Stock liquidity and managerial short-termism

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

Research output: Journal article publicationJournal articleAcademic researchpeer-review

35 Citations (Scopus)


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.
Original languageEnglish
Pages (from-to)44-59
Number of pages16
JournalJournal of Banking and Finance
Publication statusPublished - 1 Nov 2015


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

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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