The Effect of Economic Policy Uncertainty on Investor Information Asymmetry and Management Disclosures
55 Pages Posted: 22 Sep 2016 Last revised: 19 Jun 2018
Date Written: June 19, 2018
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 significantly influenced by most individual managers and investors, namely 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. These findings are consistent across a variety of empirical specifications. 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
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