The literature offers three views on the effect of stock liquidity on accruals-based earnings management. According to the takeover threat view, stock liquidity makes a firm prone to hostile takeovers and thereby spurs its managers to use accruals-based earnings management to move stock price...

Because stock liquidity should improve managers’ access to external information, we examine whether managers of firms with higher stock liquidity form more accurate accrual estimates. Consistent with our expectations, we find that accrual estimation errors of firms with more liquid stocks are...