Earnings quality and equity liquidity: evidence from Tunisia

This paper examines the association between earnings quality and equity liquidity of Tunisian listed firms. Analysis on the liquidity of an emerging market such as the BVMT is very appealing because it is the most important quality investors look for. Earnings quality seems to influence stocks' liquidity in regard to its impact on the information asymmetry. Based on a sample of 20 firms over a period from 2000 to 2005, we find that there is a statistically significant relationship between our proxy of earnings quality and liquidity after controlling the stock exchange, size, returns of the equity and volatility. Our results support that firms with higher earnings quality have lower bid-ask spreads and lower adverse selection spread components. This result supports theoretical models predicting that more quality of financial and accounting information is associated with a higher level of liquidity.