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Stock liquidity and managerial short-termism

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

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.

Suggested Citation

  • Chen, Yangyang & Rhee, S. Ghon & Veeraraghavan, Madhu & Zolotoy, Leon, 2015. "Stock liquidity and managerial short-termism," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 44-59.
    • Handle: RePEc:eee:jbfina:v:60:y:2015:i:c:p:44-59
    DOI: 10.1016/j.jbankfin.2015.07.007
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    More about this item

    Keywords

    Stock liquidity; Managerial short-termism; Earnings management; Corporate governance; Cost of capital;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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