For the second year of this research grant, the researcher team focuses on alternative explanation of earnings quality and valuation via stock liquidity. This study investigates the impact of market-based earnings quality (EQ) on firms valuation via stock liquidity, based on data from Indonesian stock market comprising 73 non-financial firms listed in Kompas100 Index in 2010, between 2013 and 2016. Employing an OLS regression model, this study finds that market-based EQ index of Indonesian listed firms is negatively related to stock liquidity, measured by relative spread, implying that the higher the firms EQ, the more liquid its stocks in the market. In specific, Relevance attribute is the significant EQ attribute to affect the stock liquidity. To test the impact of stock liquidity on the firm valuation, this study uses a two-Stage Least Regression (2SLS) introducing stock liquidity, as an endogenous variable, predicted by market-based EQ, to estimate firms valuation. This study finds a negative coefficient of relative spreads and Tobins Q. It implies that the more liquid the stock, the higher its market valuation. Thus, it can be concluded that higher EQ positively affects Indonesian firms value through its ability to positively influence investors perception and operational performance that is shown in higher market value.

earnings quality, stock liquidity, firm valuation, Indonesian firms

• Prof. Dezie Leonarda Warganegara, Ph.D.

• Prof. Ir. Yanthi Rumbina Ianova Hutagaol, M.Acc., Ph.D