Earnings management and country-level characteristics as determinants of stock liquidity in Latin America

ABSTRACT

We analysed the effects of accrual-based earnings management and countries’ institutional-financial development on stock liquidity of Latin American firms, specifically in MILA countries. We used a panel data composed of 478 companies between 2000 and 2016. Our results indicate that positive discretional accruals have a positive and non-linear impact on stock liquidity. This effect turns negative when positive discretionay accruals are higher than threshold values. Regardless of the direction of accounting manipulation, earnings management reduces stock liquidity. The IFRS adoption mitigates the effects of earnings management on stock liquidity. These findings suggest that IFRS are an effective control measure that limits discretionary use of accounting criteria by managers. Institutional and financial development of countries promotes stock liquidity. Only institutional development can mitigate the effect of EM on liquidity. These results are relevant for investors and policymakers due to their implications on firms’ corporate governance, investment decisions and financial policy design.

KEYWORDS:

• Stock liquidity
• earnings management
• institutional environment
• financial development

JEL CODES:

• G14
• G18
• G34
• G41

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

Funded by the Direction of Research and Development of the University of Concepción through the VRID Multidisciplinary project No. 2020-000-141MUL .