Gauging the effects of stock liquidity on earnings management: evidence from the SEC tick size pilot test

Dan Li, Ying Xia

Research output: Contribution to journalArticleResearchpeer-review

Abstract

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.

Original languageEnglish
Article number101904
Number of pages19
JournalJournal of Corporate Finance
Volume67
DOIs
Publication statusPublished - Apr 2021

Keywords

  • Institutional investors
  • Real earnings management
  • Short selling
  • Stock liquidity

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