Stock liquidity and managerial short-termism

Yangyang Chen, Sangghon Rhee, Madhu Veeraraghavan, Leon Zolotoy

    Research output: Contribution to journalArticleResearchpeer-review

    15 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

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