The Effect of Economic Policy Uncertainty on Investor Information Asymmetry and Management Disclosures

Abstract

Investor uncertainty about firm value drives investors' information collection and trading activities, as well as managers' disclosure choices. This study examines an important source of uncertainty that likely cannot be influenced by most managers and investors: uncertainty about government economic policy. We find that this uncertainty is associated with increased bid-ask spreads and decreased stock price reactions to earnings surprises. Managers respond to this uncertainty by increasing their voluntary disclosures, but these disclosures only partly mitigate the bid-ask spread increase. We conclude that government economic policy uncertainty is an important component of firms' information environments and managers' voluntary disclosure decisions.

Keywords: Corporate Disclosure; Economic Policy Uncertainty; Information Asymmetry

JEL Classification: D80, E61, E65, G12, G14, G18, L50