Stock liquidity and managerial short-termism

Yangyang Chen, Sangghon Rhee, Madhu Veeraraghavan, Leon Zolotoy

    Research output: Contribution to journalArticleResearchpeer-review

    7 Citations (Scopus)

    Abstract

    We examine whether stock liquidity exacerbates or mitigates managerial short-termism. Utilizing earnings management as a proxy for managerial short-termism, we establish three major findings. First, firms with liquid stocks engage in less accrual-based and real earnings management. Second, the effect of stock liquidity on earnings management is amplified for firms with high levels of managerial pay-for-performance sensitivity. Third, the positive association between the intensity of earnings management and firm cost of capital is evident only for firms with low stock liquidity. Our findings are consistent with the threat of blockholder exit as the main governance channel through which stock liquidity discourages opportunistic earnings management and mitigates managerial short-termism.
    Original languageEnglish
    Pages (from-to)44 - 59
    Number of pages16
    JournalJournal of Banking and Finance
    Volume60
    DOIs
    Publication statusPublished - 2015

    Cite this

    Chen, Yangyang ; Rhee, Sangghon ; Veeraraghavan, Madhu ; Zolotoy, Leon. / Stock liquidity and managerial short-termism. In: Journal of Banking and Finance. 2015 ; Vol. 60. pp. 44 - 59.
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    abstract = "We examine whether stock liquidity exacerbates or mitigates managerial short-termism. Utilizing earnings management as a proxy for managerial short-termism, we establish three major findings. First, firms with liquid stocks engage in less accrual-based and real earnings management. Second, the effect of stock liquidity on earnings management is amplified for firms with high levels of managerial pay-for-performance sensitivity. Third, the positive association between the intensity of earnings management and firm cost of capital is evident only for firms with low stock liquidity. Our findings are consistent with the threat of blockholder exit as the main governance channel through which stock liquidity discourages opportunistic earnings management and mitigates managerial short-termism.",
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    Chen, Y, Rhee, S, Veeraraghavan, M & Zolotoy, L 2015, 'Stock liquidity and managerial short-termism', Journal of Banking and Finance, vol. 60, pp. 44 - 59. https://doi.org/10.1016/j.jbankfin.2015.07.007

    Stock liquidity and managerial short-termism. / Chen, Yangyang; Rhee, Sangghon; Veeraraghavan, Madhu; Zolotoy, Leon.

    In: Journal of Banking and Finance, Vol. 60, 2015, p. 44 - 59.

    Research output: Contribution to journalArticleResearchpeer-review

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    AU - Zolotoy, Leon

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    N2 - We examine whether stock liquidity exacerbates or mitigates managerial short-termism. Utilizing earnings management as a proxy for managerial short-termism, we establish three major findings. First, firms with liquid stocks engage in less accrual-based and real earnings management. Second, the effect of stock liquidity on earnings management is amplified for firms with high levels of managerial pay-for-performance sensitivity. Third, the positive association between the intensity of earnings management and firm cost of capital is evident only for firms with low stock liquidity. Our findings are consistent with the threat of blockholder exit as the main governance channel through which stock liquidity discourages opportunistic earnings management and mitigates managerial short-termism.

    AB - We examine whether stock liquidity exacerbates or mitigates managerial short-termism. Utilizing earnings management as a proxy for managerial short-termism, we establish three major findings. First, firms with liquid stocks engage in less accrual-based and real earnings management. Second, the effect of stock liquidity on earnings management is amplified for firms with high levels of managerial pay-for-performance sensitivity. Third, the positive association between the intensity of earnings management and firm cost of capital is evident only for firms with low stock liquidity. Our findings are consistent with the threat of blockholder exit as the main governance channel through which stock liquidity discourages opportunistic earnings management and mitigates managerial short-termism.

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