TY - JOUR
T1 - Gauging the effects of stock liquidity on earnings management
T2 - evidence from the SEC tick size pilot test
AU - Li, Dan
AU - Xia, Ying
PY - 2021/4
Y1 - 2021/4
N2 - This paper studies whether stock market liquidity has a causal effect on real earnings management. We introduce a new and cleaner identification of liquidity shock - the 2016 Tick Size Pilot Program - to show that firms with less liquid stocks are more likely to engage in real earnings management. We provide direct evidence that stock liquidity helps to deter real earnings management via enhancing governance by long-term institutional investors through trading and direct intervention, and via facilitating short selling to discipline managers. The effect is stronger in firms that do not pay dividends.
AB - This paper studies whether stock market liquidity has a causal effect on real earnings management. We introduce a new and cleaner identification of liquidity shock - the 2016 Tick Size Pilot Program - to show that firms with less liquid stocks are more likely to engage in real earnings management. We provide direct evidence that stock liquidity helps to deter real earnings management via enhancing governance by long-term institutional investors through trading and direct intervention, and via facilitating short selling to discipline managers. The effect is stronger in firms that do not pay dividends.
KW - Institutional investors
KW - Real earnings management
KW - Short selling
KW - Stock liquidity
UR - http://www.scopus.com/inward/record.url?scp=85101142584&partnerID=8YFLogxK
U2 - 10.1016/j.jcorpfin.2021.101904
DO - 10.1016/j.jcorpfin.2021.101904
M3 - Article
AN - SCOPUS:85101142584
SN - 0929-1199
VL - 67
JO - Journal of Corporate Finance
JF - Journal of Corporate Finance
M1 - 101904
ER -