Stock liquidity and managerial short-termism

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

17 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)44-59
Journal / PublicationJournal of Banking and Finance
Volume60
Online published4 Aug 2015
Publication statusPublished - Nov 2015
Externally publishedYes

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.

Research Area(s)

  • Stock liquidity, Managerial short-termism, Earnings management, Corporate governance, Cost of capital

Citation Format(s)

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

In: Journal of Banking and Finance, Vol. 60, 11.2015, p. 44-59.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review