Economic policy uncertainty and stock liquidity: the role of board networks in an emerging market

Abstract

PurposeThe purpose of this study is to examine the role of board networks in promoting stock liquidity when there is high economic policy uncertainty using a sample of Brazilian firms from 2002 to 2015.Design/methodology/approachThe study employs the ordinary least squares estimation method with standard errors clustered at the firm level for preliminary analysis, besides the study employs the two-step GMM dynamic estimation method to deal with potential endogeneity issues.FindingsFirst, the findings show that economic policy uncertainty disproportionately contributes to stock illiquidity and the impact is mainly prominent for high risky companies, small firms and firms in competitive industries. Second, the author provides evidence that board networks promote stock liquidity more via the information channel when economic policy uncertainty is very high.Practical implicationsGiven the adverse effects of economic policy uncertainty on stock liquidity, governments need to swiftly communicate and implement policies that affect the capital market to avoid the drying up of liquidity, which is exacerbated by communication or implementation lags. Also, there is a need for the regulators to continuously encourage the inclusion of independent directors in boards, which helps to increase board monitoring capacity and the firms' ability to respond to changes in the external environment.Originality/valueUnlike other studies that focus on the adverse effects of economic policy uncertainty on firm outcomes, the novel contribution is that the author uncovers the role of board networks in mitigating the negative effects of economic policy uncertainty on stock liquidity.