Do firms' earnings management practices affect their equity liquidity?
AbstractThis 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 InfoArticle provided by Elsevier in its journal Finance Research Letters.
Volume (Year): 6 (2009)
Issue (Month): 3 (September)
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Web page: http://www.elsevier.com/locate/frl
Equity liquidity Adverse selection costs Earnings management;
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