Do firms' earnings management practices affect their equity liquidity?

Huimin Chung, Her Jiun Sheu, Juo Lien Wang*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

15 Scopus citations

Abstract

This study investigates the relationship between earnings management and equity liquidity, positing that as incentives arise for the manipulation of firm performance through earnings management (due partly to conflicts of interest between firm insiders and outsiders), greater earnings management may signal higher adverse selection costs. If earnings manipulation reveals aggressive accounting practices, liquidity providers tend to widen bid-ask spreads to protect themselves. The empirical results indicate that companies with higher earnings management suffer lower equity liquidity.

Original languageEnglish
Pages (from-to)152-158
Number of pages7
JournalFinance Research Letters
Volume6
Issue number3
DOIs
StatePublished - 1 Sep 2009

Keywords

  • Adverse selection costs
  • Earnings management
  • Equity liquidity

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