Stock liquidity and managerial short-termism

Yangyang Chen, S. Ghon Rhee, Madhu Veeraraghavan and Leon Zolotoy

Journal of Banking & Finance, 2015, vol. 60, issue C, 44-59

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.

Keywords: Stock liquidity; Managerial short-termism; Earnings management; Corporate governance; Cost of capital (search for similar items in EconPapers)
JEL-codes: G10 G30 M40 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:60:y:2015:i:c:p:44-59

DOI: 10.1016/j.jbankfin.2015.07.007

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