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Do firms' earnings management practices affect their equity liquidity?

Author

Listed:
  • Chung, Huimin
  • Sheu, Her-Jiun
  • Wang, Juo-Lien

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.

Suggested Citation

  • Chung, Huimin & Sheu, Her-Jiun & Wang, Juo-Lien, 2009. "Do firms' earnings management practices affect their equity liquidity?," Finance Research Letters, Elsevier, vol. 6(3), pages 152-158, September.
  • Handle: RePEc:eee:finlet:v:6:y:2009:i:3:p:152-158
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    References listed on IDEAS

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    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.
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    Cited by:

    1. repec:eee:riibaf:v:42:y:2017:i:c:p:1164-1172 is not listed on IDEAS
    2. repec:bbz:fcpbbr:v:10:y:2013:i:4:p:110-132 is not listed on IDEAS
    3. Harris, Terry, 2017. "Earnings announcements and quoted bid-ask spreads of U.S. Bank Holding Companies," Finance Research Letters, Elsevier, vol. 20(C), pages 223-228.
    4. Kyaw, Khine & Olugbode, Mojisola & Petracci, Barbara, 2015. "Does gender diverse board mean less earnings management?," Finance Research Letters, Elsevier, vol. 14(C), pages 135-141.
    5. Pelucio-Grecco, Marta Cristina & Geron, Cecília Moraes Santostaso & Grecco, Gerson Begas & Lima, João Paulo Cavalcante, 2014. "The effect of IFRS on earnings management in Brazilian non-financial public companies," Emerging Markets Review, Elsevier, vol. 21(C), pages 42-66.
    6. Baschieri, Giulia & Carosi, Andrea & Mengoli, Stefano, 2016. "Does the earnings quality matter? Evidence from a quasi-experimental setting," Finance Research Letters, Elsevier, vol. 19(C), pages 146-157.
    7. 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.

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