Earnings Management and Stock Liquidity: Evidence From Turkey

Abstract

This chapter tests whether the earnings management practices in Turkey are considered informative or opportunistic by outside investors by examining its effect on stock liquidity. Earnings management is measured by discretionary accruals calculated by two different competing methods. Stock liquidity is also proxied by two different measures: the illiquidity measure of Amihud and the turnover ratio. Amihud's illiquidity measure indicates firms' daily price responses associated with the trading volume and the turnover ratio indicates how many times a stock changes its owner in a year. Relevant control variables are also included in the models. A positive association between earnings management and stock liquidity implies informative earnings management and vice versa. Earnings management is found to be positively associated with stock market liquidity. Results favor the informative earnings management view for Turkish firms and are robust to alternative specifications of earnings management and stock liquidity measures.

Key Terms in this Chapter

Discretionary Accruals: The unobserved part of total accruals left when the estimated non-discretionary accruals are deducted from total accruals.

Informative Earnings Management: Earnings management conducted by motivations of conveying information of managers about firms’ prospects.

Earnings Management: Intentionally alterations of financial figures of companies by managers.

Opportunistic Earnings Management: Earnings management conducted by motivations of concealing unfavorable performance of firms.

Corporate Governance: Set of rule and mechanisms tailored to align the interests of various stakeholders of companies.

Stock Liquidity: The ease of selling of a particular stock in the market.

Information Asymmetry: Possession of superior information by some parties about the subject of an economic transaction.