Does Stock Market Liquidity Help Deter Earnings Management? Evidence from the SEC Tick Size Pilot Test
45 Pages Posted: 18 Aug 2016 Last revised: 6 Jul 2019
Date Written: July 3, 2019
In this paper, we study whether stock market liquidity has a causal effect on earnings management using a sample of U.S. public firms. We introduce a new and cleaner identification of a liquidity shock—the 2016 Tick Size Pilot Program—to show that firms with less liquid stocks are more likely to meet or marginally beat analyst earnings forecasts, and engage in real earnings management. We provide direct evidence that stock liquidity helps to deter earnings management via enhancing governance by long-term institutional investors through trading and direct intervention, and via facilitating short selling to discipline managers. The effect is stronger in firms that do not pay dividends.
Keywords: Stock Liquidity; Real Earnings Management; Meet Analyst forecast; Institutional Investors; Short Seller
JEL Classification: G14; G23; M41
Suggested Citation: Suggested Citation