Quality of Financial Information and Liquidity

Abstract

This paper examines the relationship between liquidity and quality of financial information by analyzing long-term trends in Amihud’s (2002) illiquidity measure for firms that restate financial statements. I find that for most income decreasing restatements illiquidity increases several months before restatement announcement and remains at elevated levels one year after restatement. The result is most pronounced for firms listed on NASDAQ. Increase in illiquidity is greater upon restatements due to revenue recognition, those prompted by party other than auditor, those made by larger firms with high volatility of returns and low price levels. Income increasing restatements do not affect information asymmetry of the firm. Overall, my results indicate a positive relationship between quality of financial information and liquidity.

Keywords: liquidity, financial statement restatements, misreporting, earnings management, information asymmetry, quality of financial information, disclosure

JEL Classification: G14, G12, M41