We study the relationship between stock market liquidity and earnings management. Using a sample of U.S. public firms over the time period from 1993 to 2012, we find that firms with more liquid stocks have lower level of both real and accrual-based earnings management. The result is robust to the use of various measures of liquidity. We address the endogeneity problem by using instrumental variable approach and two sources of exogenous shocks to stock liquidity, i.e. stock split and Decimalization. These methods provide evidence of a causal effect of liquidity on earnings management. We further find that liquidity curbs earnings management by mitigating the information asymmetry between managers and shareholder and facilitating governance by large institutional investors.