The Impact of Economic Policy Uncertainty on Stock Liquidity with a Focus on the Role of Financial Disclosure

Document Type : Original Article

Authors

• Reza Abbas Zadeh Amiri ¹
• Hamid Reza Bazzaz zadeh Torbati ²
• Mohammad Reza Abbaszadeh ³
• Alireza Mehrazin ⁴
• Mohammad Karimi ⁵

¹ Department of accounting ,Neyshabur Branch ,Islamic azad university Neyshabur , Iran

² Department of Accounting,neyshabur branch, Islamic Azad University ,neyshabur, Iran

³ Department of Economics and Administrative Sciences, Ferdowsi University Of mashhad, mashhad, Iran

⁴ Department of Accounting,neyshabur branch, Islamic Azad University , neyshabur, Iran

⁵ Department of Management ,neyshabur branch, Islamic Azad University , neyshabur, Iran

10.22067/ijaaf.2025.46686.1531

Abstract

Low market liquidity is often a direct consequence of economic policy uncertainty. Persistent policy fluctuations and a lack of transparency in economic decision-making erode investor confidence, resulting in lower trading volumes and reduced liquidity. Most stock markets around the world are not frictionless; increased economic policy uncertainty, high transaction costs, investor protection concerns, and information asymmetry further exacerbate market frictions. Changes in government policies or actions that alter the economic environment can significantly influence price reactions in financial markets. This study aims to investigate the relationship between economic policy uncertainty and stock liquidity, as well as the moderating effect of information disclosure on this relationship. To achieve this, accurate and consistent data were required; therefore, all companies listed on the Tehran Stock Exchange (TSE) were considered the study population. Data from 64 listed firms, spanning the period 2007–2021, were collected as the accessible sample to test the research hypotheses. Following the model proposed by Baker et al. (2016), a newspaper-based index of policy uncertainty was used to measure economic policy uncertainty. The moderating variable—information disclosure—was assessed using the Botosan (1997) disclosure index. Panel data econometrics and Estimated Generalized Least Squares (EGLS) regression models were employed to test the hypotheses, supported by diagnostic tests for stationarity, multicollinearity, normality, heteroscedasticity, and autocorrelation. The results indicate that economic policy uncertainty has a negative effect on stock liquidity. Moreover, economic policy uncertainty has no positive influence on information disclosure. Finally, information disclosure was found to mitigate the adverse impact of economic policy uncertainty on stock liquidity, confirming its moderating role. Overall, the findings suggest that managers tend to produce more information in response to information asymmetry shocks induced by economic policy uncertainty, thereby bridging the informational gap between insiders and market participants. When information asymmetry intensifies due to policy uncertainty—between informed traders (firms) and uninformed traders (potential investors)—managers have more substantial incentives to engage in voluntary disclosure to reduce informational frictions.

Keywords

• Economic Policy Uncertainty
• Information Asymmetry
• Information Disclosure
• Stock Liquidity

Main Subjects

• Accounting

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