5. Conclusion
This study examines the consequences of real activities manipulation on information asymmetry in Spain. Previous studies have examined this association basically for US markets, providing inconclusive evidence. We consider that the analysis of the Spanish market may shed new light because it exhibits a weaker investor protection, lower accounting quality and stock market liquidity, and higher incentives for investors to search for private information than US. We use 468 firm-year observations from 2001 to 2008 and an information asymmetry index built on microstructure measures such as the bid-ask spread, illiquidity measure developed in Amihud (2002), price impact introduced by Huang and Stoll (1996), PIN, and VPIN.
In line with previous literature, we find that firms with high strong incentives to engage in earnings management to just meet last year’s earnings, show higher levels of income increasing REM. Overall, our evidence on the association between REM and information asymmetry is consistent with the prediction that firms’ strategies of REM garble the market and create information asymmetry among traders. Thus, in a setting where REM measures are highly likely to indicate low earnings quality (suspect sample) we find a significant and positive association between proxies for earnings management through real activities manipulation and information asymmetry among investors. In contrast, in a setting where the empirical proxies for REM could be capturing situations rather related with business circumstances than with earnings manipulation, we find that deviations from normal activity are significantly and negatively associated with the level of information asymmetry. Thus, we show that the private information production and its influence on the level of information asymmetry in the market depend on firm’s circumstances.
