Impact of Policy Uncertainty on Stock Liquidity: Cross-sectional Effects and Economic Channels
49 Pages Posted: 20 Dec 2017 Last revised: 17 Dec 2019
Date Written: January 16, 2018
We document a negative impact of policy uncertainty on stock liquidity. The impact is stronger for firms whose returns are more sensitive to policy uncertainty or those with higher levels of political risk, and more government dependency. Policy uncertainty affects stock liquidity via three channels. First, stocks with higher information asymmetry are more adversely affected by policy uncertainty. Second, policy uncertainty affects cash flow risk and return volatility, which results in an exacerbation of stock illiquidity. Finally, policy uncertainty worsens funding liquidity, leading to lower stock liquidity. Overall, our findings highlight the importance of policy uncertainty on secondary market liquidity.
Keywords: Policy Uncertainty, Stock Liquidity, Information Asymmetry, Cash-flow Risk, Funding Liquidity
JEL Classification: G14, G18, G34
Suggested Citation: Suggested Citation