Stock Liquidity Risk and Earnings Quality

Based on prior research conducted in different countries, the quality of information provided by the accounting system could affect the stock liquidity risk. In general terms, higher quality of information causes lower liquidity risk. This paper clarifies the relationship between earnings quality and stock liquidity risk. Selected earnings quality criteria are including relevance, reliability, persistency and smoothness of accounting earnings. Period of six years from the beginning of 1383 (2004) till the end of 1388 (2009) is applied and the sample includes 62 companies among listed companies in Tehran Stock Exchange. Multivariate regressions for statistical analysis coupled with eight control variables (size, ratio of book to market value, the institutional investor's ownership percentage, stock returns, stock volatility and triple risk coefficients Fama - French model) is used in the models. Findings has shown that there is significant relationship between relevance, reliability and smoothness of reported accounting earnings with stock liquidity risk, and higher quality of reported earnings causes lower liquidity risk. Therefore, it can be argued that the quality of disclosed accounting information has a role in the reduction of stock liquidity risk.