Economic Policy Uncertainty and Stock Liquidity: The Mitigating Effect of Information Disclosure.

Abstract We examine the relationship between economic policy uncertainty, information disclosure and stock liquidity using a large sample of Chinese firms. We first establish that economic policy uncertainty leads to declining stock liquidity. Next, we provide evidence that managers respond to uncertainty shocks to their firm’s information environment by producing more information. Cross-sectional tests indicate that voluntary information disclosure increases more for firms with higher external information demand and with no implicit guarantees. Furthermore, we find that high information disclosure quality mitigates the negative impact of heightened economic policy uncertainty on stock liquidity. This impact is more pronounced for firms with poor information environments and private firms. Additionally, we provide further evidence using cumulative abnormal returns that in periods of high economic policy uncertainty, investors react more to management earnings announcements for firms with high information disclosure quality. Finally, we uncover that increased information disclosure quality improves financial analysts forecast precision more when policy uncertainty is high.