Abstract
ABSTRACT We investigate the effect of geopolitical uncertainty on stock liquidity by using the Taiwan misfired missile event as a natural experiment. This exogenous event provides us with a unique opportunity to overcome the challenges of time recognition and confounding economic effects in the identification. We find that geopolitical uncertainty has a significantly negative effect on the stock liquidity of Taiwan-related firms. The mechanism test shows that the increased stock price risk and information asymmetry are the two main channels through which geopolitical uncertainty decreases stock liquidity. Moreover, we find that firms’ higher information transparency and regulators’ timely information disclosure on geopolitical events can effectively mitigate the negative impact of geopolitical uncertainty on stock liquidity.
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