Does Stock Liquidity Affect Accrual‐Based Earnings Management?

31 Pages Posted: 25 Apr 2017

See all articles by Kelly Huang

Kelly Huang

Florida International University

Brent Lao

Florida International University (FIU)

Gregory P. McPhee

Clemson University

Date Written: March/April 2017

Abstract

This study investigates the effects of stock liquidity on earnings management. While prior research finds that liquidity has mixed effects on corporate governance, our baseline regression results show that an increase in stock liquidity is associated with an increase in discretionary accruals and revenues. To establish causality, we use two quasi‐natural experiments that exploit exogenous increases in stock liquidity resulting from regulatory changes to the minimum tick size. The results of our difference‐in‐differences approach indicate that stock liquidity increases accrual‐based earnings management. Additional analysis suggests that liquidity affects earnings management by magnifying the effects of takeover pressure and equity compensation.

Keywords: stock liquidity, earnings management, corporate governance, managerial myopia

Suggested Citation

Huang, Kelly and Lao, Brent and McPhee, Gregory P., Does Stock Liquidity Affect Accrual‐Based Earnings Management? (March/April 2017). Journal of Business Finance & Accounting, Vol. 44, Issue 3-4, pp. 417-447, 2017, Available at SSRN: https://ssrn.com/abstract=2957926 or http://dx.doi.org/10.1111/jbfa.12236

Kelly Huang (Contact Author)

Florida International University ( email )

11200 SW 8th Street
Miami, FL 33199
United States

Brent Lao

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Gregory P. McPhee

Clemson University ( email )

School of Accountancy
300 Sirrine Hall
Clemson, SC 29634
United States

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