When are earnings informative?

Mona Elbannan and Omar Farooq

International Journal of Islamic and Middle Eastern Finance and Management, 2019, vol. 12, issue 3, 388-406

Abstract: Purpose - This paper aims to examine the impact of stock market liquidity on the value of reported earnings in Egypt, proxied by the earnings–return relationship, during the period between 2006 and 2015. Design/methodology/approach - To achieve this objective, this paper uses a sample including all active firms listed on the Egyptian Stock Exchange. This study employs multivariate panel data regression analysis with fixed effects estimated using robust standard errors, and control for other variables. All financial, accounting and stock market data are collected from the Thomson Reuters Worldscope and Datastream databases. Findings - The empirical results report a significant positive relation between liquidity and earnings informativeness. This study argues that in environments with high information asymmetries, reported earnings are informative conditional on stock liquidity. All results remain valid when using heteroscedasticity-robust standard errors clustered across firms, alternative measures of liquidity, sub-groups of different sizes and estimating quantile regressions. Originality/value - This paper identifies stock price liquidity as a significant determinant of stock price informativeness of earnings in Egypt. In particular, stock liquidity reduces agency conflicts and information asymmetries between managers and market investors, and thereby decreases managerial incentives to misreport earnings. This consequently enhances the quality of reported earnings and the informativeness of prices.

Keywords: Emerging markets; Earnings management; Stock liquidity; Agency problem; Earnings informativeness (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-08-2018-0270

DOI: 10.1108/IMEFM-08-2018-0270

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