International Evidence On The Effect Of Economic Policy Uncertainty On Stock Market Liquidity PDF Download

In this dissertation, I investigate the impact of economic policy uncertainty on stock market liquidity across a broad cross-section of countries. My dissertation is composed of three distinct yet related essays. My first essay examines the impact of economic policy uncertainty on stock liquidity and various firm-level cross-sectional variables explaining the uncertainty-liquidity relationship. The focus of the second essay, using a sample for non-U.S. stocks cross-listed in the U.S., is to examine the role of cross-listing in moderating the above impact. In the third essay, I examine the market liquidity and country-level factors that explain the relationship between economic policy uncertainty and market liquidity.In the first essay, I investigate the impact of economic policy uncertainty on stock liquidity using an international sample of twenty-four countries spanning twenty-three years. The sample countries include fourteen developed and ten emerging countries. In this essay, I initially provide global evidence on the adverse impact of economic policy uncertainty (EPU) on stock liquidity.The result holds for all the countries in the sample except Croatia and Russia. Subsequently, I investigate the role of firms' information environment in explaining the uncertainty-liquidity relationship. Considering informational transparency and quality of information as two aspects of the information environment, I find that firm-level informational transparency plays a significant role in mitigating EPU's effect on stock liquidity, whereas the quality of information does not.In the second essay, I investigate whether cross-listing a non-U.S. stock in the U.S. reduces the detrimental impact of EPU on the liquidity of that stock. My sample of cross-listed stocks includes the stocks from twenty countries, cross-listed in the U.S. In this essay, I first examine how domestic and U.S. EPUs affect the domestic liquidity of cross-listed stocks relative to their non-cross-listed domestic counterparts. Based on the findings, I document that cross-listing helps mitigate the negative impact of economic policy uncertainty on stock liquidity--literature on cross-listing and liquidity documents that the impact of cross-listing on liquidity is contingent upon country characteristics. Using further analysis, I show that the role of cross-listing in mitigating the negative impact of EPU on domestic liquidity is contingent on home country characteristics. I provide evidence that cross-listing helps mitigate the negative impact for the stocks of developed strong governance countries but not for stocks of emerging and weak governance countries. The role of cross-listing in moderating the relationship between EPU and liquidity is stronger for common law countries relative to civil law countries.In the third essay, I examine the impact of economic policy uncertainty on stock market liquidity. Using a broad sample of twenty-four countries, I focus on the country-level characteristics that affect the EPU-liquidity relationship. Specifically, I study the role of market segmentation, financial development, funding constraint, and the country's governance structure in shaping the above relationship. I find that a country's financial development and its governance mechanism help mitigate EPU's negative effect on stock market liquidity. However, market integration, as captured through trade openness and political stability, worsen the impact.