On the Relationship between Earnings Management and Market Liquidity —Eidence from Shenzhen A-share markets

This paper studied the relationship between earnings management and market liquidity by employing 2006-2010 sample data based on the Shenzhen Stock Exchange listed companies. It computed turnover and illiquidity ratio to measure market liquidity, and abnormal accruals estimation error, small reported earnings, the signed and absolute value of abnormal cash flows from operation,the signed and absolute value of abnormal discretionary expenses as earnings management measures. It found new evidence that firms which exhibited greater earnings management were associated with lower market liquidity. The single-variable regression results showed that the earnings management reduced the market liquidity. The multi-variable model revealed that company’s stock market liquidity and earnings management were negatively related whether earnings management were accounting-based earnings management measure or based on actual business restructuring. In view of this the regulatory authorities should further improve accounting standards, strengthen the information disclosure regulation and improve the quality of information disclosure.