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Do firms' earnings management practices affect their equity liquidity?

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  • Chung, Huimin
  • Sheu, Her-Jiun
  • Wang, Juo-Lien
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    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Finance Research Letters.

    Volume (Year): 6 (2009)
    Issue (Month): 3 (September)
    Pages: 152-158

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    Handle: RePEc:eee:finlet:v:6:y:2009:i:3:p:152-158

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    Web page: http://www.elsevier.com/locate/frl

    Related research

    Keywords: Equity liquidity Adverse selection costs Earnings management;

    References

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    1. K.V. Peasnell & P.F. Pope & S. Young, 2005. "Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7-8), pages 1311-1346.
    2. Richardson, Vernon J, 2000. " Information Asymmetry and Earnings Management: Some Evidence," Review of Quantitative Finance and Accounting, Springer, vol. 15(4), pages 325-47, December.
    3. Hans R. Stoll, . "The Supply of Dealer Services in Securities Markets," Rodney L. White Center for Financial Research Working Papers 02-78, Wharton School Rodney L. White Center for Financial Research.
    4. Brockman, Paul & Howe, John S. & Mortal, Sandra, 2008. "Stock market liquidity and the decision to repurchase," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 446-459, September.
    5. Hans R. Stoll, 2000. "Presidential Address: Friction," Journal of Finance, American Finance Association, vol. 55(4), pages 1479-1514, 08.
    6. Ananth Madhavan & Matthew Richardson & Mark Roomans, . "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Rodney L. White Center for Financial Research Working Papers 20-94, Wharton School Rodney L. White Center for Financial Research.
    7. Pankaj K. Jain & Jang-Chul Kim & Zabihollah Rezaee, 2008. "The Sarbanes-Oxley Act of 2002 and Market Liquidity," The Financial Review, Eastern Finance Association, vol. 43(3), pages 361-382, 08.
    8. Bonnie F. Van Ness & Robert A. Van Ness & Richard S. Warr, 2002. "Is the Adverse Selection Component Really Higher on the NYSE/Amex than on the Nasdaq?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(5&6), pages 807-824.
    9. Chung, Huimin, 2006. "Investor protection and the liquidity of cross-listed securities: Evidence from the ADR market," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1485-1505, May.
    10. George, Thomas J & Kaul, Gautam & Nimalendran, M, 1991. "Estimation of the Bid-Ask Spread and Its Components: A New Approach," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 623-56.
    11. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
    12. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
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    Cited by:
    1. Esmaeel Farzaneh Kargar & Eesa Zarei, 2014. "Reviewing the Relationship between Institutional Ownership and Outside Members of Board of Directors, and Liquidity of Common Stocks of Companies Quoted in Tehran Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(2), pages 218-231, April.
    2. Marta Cristina Pelucio Grecco, 2013. "The Effect of Brazilian convergence to IFRS on earnings managment by listed Brazilian nonfinancial companies," Brazilian Business Review, Fucape Business School, vol. 10(4), pages 110-132, October.

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