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Published: 2015
Stock Liquidity and Managerial Short-termism
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.
Publication Details:
Published: 2015
Volume: 60
Pages: 44–59
Journal: Journal of Banking & Finance
Authors: Yangyang Chen, S. Ghon Rhee, Madhu Veeraraghavan, Leon Zolotoy
Publication Status: Published
Chen, Y., Rhee, S. G., Veeraraghavan, M., & Zolotoy, L. (2015). Stock liquidity and managerial short-termism. Journal of Banking & Finance, 60, 44–59.