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Regulatory intensity and stock liquidity

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  • Huang, He
  • Huang, Yunying
  • Niu, Qianyu

Abstract

Using comprehensive regulatory intensity metrics from 1993 to 2019, we document that increased regulatory burden significantly reduces stock liquidity in U.S. public firms. To establish causality, we exploit exogenous variation in regulatory intensity following state ruling party changes. This identification strategy confirms that the negative relationship is causal rather than merely correlational. Our analysis reveals that information asymmetry serves as the primary mechanism, as regulatory intensity increases uncertainty about firms’ future operations, exacerbating information asymmetry between investors and companies. The liquidity deterioration is particularly pronounced for firms with higher investment irreversibility, greater financial constraints, and those without government customers. These findings contribute to understanding how regulatory burdens affect market functioning.

Suggested Citation

  • Huang, He & Huang, Yunying & Niu, Qianyu, 2026. "Regulatory intensity and stock liquidity," Journal of Financial Stability, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:finsta:v:85:y:2026:i:c:s1572308926000549
    DOI: 10.1016/j.jfs.2026.101552
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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