2022 - Lei - Political Policy Uncertainty Corporate Disclosure and Information Asymmetry

Political/Policy Uncertainty, Corporate
Disclosure, and Information Asymmetry*

LIJUN (GILLIAN) LEI, University of North Carolina at Greensboro†
YAN LUO, San Diego State University
ABSTRACT
Political/policy uncertainty causes significant disruption to capital markets around the
world. This review synthesizes recent studies on this topic and provides suggestions for
future research in this fast-growing area. Specifically, this review focuses on three areas
of research: (i) the measurement of political/policy uncertainty, (ii) the impact of politi-
cal/policy uncertainty on financial analysts’ forecasts, and (iii) the impact of political/
policy uncertainty on corporate disclosure. We find that political/policy uncertainty
affects both corporate disclosures and financial analysts’ forecasts and that these effects
interact with information asymmetry in capital markets. Furthermore, we find that compa-
nies strategically change their disclosure practices during periods of heightened political/
policy uncertainty.
Keywords: political uncertainty, policy uncertainty, information asymmetry, corporate
disclosure
INCERTITUDE POLITIQUE/STRATÉGIQUE, DIVULGATION D’INFORMATION

PAR LES ENTREPRISES ET ASYMÉTRIE DE L’INFORMATION

RESUM
E
L’incertitude politique/stratégique cause des perturbations importantes sur les marchés
financiers du monde entier. La présente analyse propose un aperçu des études récentes
sur ce sujet ainsi que des suggestions pour la recherche à venir dans ce secteur qui prend
rapidement de l’ampleur. Plus précisément, elle s’attarde à trois domaines de recherche :
i) la mesure de l’incertitude politique/stratégique, ii) l’impact de cette incertitude sur les
prévisions des analystes financiers et iii) l’impact de cette incertitude sur la divulgation
d’information par les entreprises. Nous établissons que l’incertitude politique/stratégique
influence à la fois la divulgation d’information par les entreprises et les prévisions
des analystes financiers, et que ses effets interagissent avec l’asymétrie de l’information
sur les marchés financiers. En outre, nous montrons que les entreprises apportent des
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs
License, which permits use and distribution in any medium, provided the original work is properly cited, the use
is non-commercial and no modifications or adaptations are made.
* Accepted by Leslie Berger and Camillo Lento. The authors thank Camillo Lento (associate editor) and two
anonymous reviewers for valuable feedback that greatly improved the manuscript.
† Corresponding author.
AP Vol. 22 No. 1 — PC vol. 22, n 1 (2023) pages 87–110 © 2022 The Authors.
Accounting Perspectives published by Wiley Periodicals LLC on behalf
of the Canadian Academic Accounting Association.
doi:10.1111/1911-3838.12317
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88 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES
changements stratégiques à leurs pratiques de divulgation d’information pendant les

périodes où l’incertitude politique/stratégique est plus élevée.
Mots-clés : incertitude politique, incertitude stratégique, asymétrie de l’information,
divulgation d’information par les entreprises
INTRODUCTION
Political/policy uncertainty is the uncertainty associated with changes in government and
governmental policies (Julio and Yook 2012; Pastor and Veronesi 2012; Baker et al. 2016).
Recent high-profile events associated with political/policy uncertainty include the 2020 US
presidential election campaigns, the global COVID-19 pandemic, debates about Brexit,
global oil price crashes, trade wars under President Trump’s administration, and the US
federal government shutdown in 2018–2019. The outcomes, durations, and aftermaths of
such events increase uncertainty in the timing and direction of governments’ fiscal, tax,
trade, and monetary policies, which are critical determinants of corporate operational,
investment, and financing decisions (Julio and Yook 2012; Waisman et al. 2015; Gulen
and Ion 2016; Çolak et al. 2017; Jens 2017; N. H. Nguyen and Phan 2017; Bonaime
et al. 2018).
Given the important economic implications of political/policy uncertainty, scholars in
the fields of economics and finance are beginning to explore the impact of political/policy
uncertainty on real economic outcomes. They find that political/policy uncertainty not only
affects business cycles, capital inflows, and economic recoveries at the macro level
(Bloom 2009; Julio and Yook 2012; Baker et al. 2016), but also impacts investment (Gulen
and Ion 2016; Jens 2017), merger and acquisition activities (N. H. Nguyen and Phan 2017;
Bonaime et al. 2018), cash holding (Julio and Yook 2012), capital expenditure (Jens 2017;
Z. Chen et al. 2018), research and development (Atanassov et al. 2019), external financing
(Çolak et al. 2017; Jens 2017; Bonaime et al. 2018), and dividend payout (Huang
et al. 2015) at the firm level. Studies of the effects of political/policy uncertainty on capital
markets show that it decreases firm valuation (Tirtiroglu et al. 2004; Graham et al. 2005,
2012) and increases stock price volatility, stock price crash risk, and mispricing
(Boutchkova et al. 2012; Baker et al. 2016; J. Chen et al. 2017; Liu et al. 2017; X. Jin
et al. 2019; Chan et al. 2020; Fan et al. 2020). Political/policy uncertainty also affects the
debt market by increasing credit risk and the cost of debt (Francis et al. 2014; Waisman
et al. 2015; Bradley et al. 2016; Ashraf and Shen 2019; Datta et al. 2019; Gao et al. 2019;
Kaviani et al. 2020).1
Considering the capital market consequences of political/policy uncertainty docu-
mented in the literature, some researchers have begun to explore the role of information
asymmetry. Information asymmetry arises from information differences and conflicting
incentives between managers and investors. Information asymmetry causes conflicts and
frictions in capital markets that reduce market efficiency in a variety of formats and affect
1. See the Appendix for examples of corporate disclosures on the impact of specific political/policy uncer-
tainties on operational outcomes.
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POLICY UNCERTAINTY AND CORPORATE DISCLOSURE 89
various market participants; for example, information asymmetry could result in ineffi-
cient contracting or inefficient deployment of capital resources. The profound impact
of information asymmetry on capital market efficiency has motivated a vast body of
research in accounting and other disciplines on the determinants and consequences of infor-
mation asymmetry and the mechanisms that can reduce information asymmetry (Healy and
Palepu 2001). Given the capital market consequences of political/policy uncertainty docu-
mented in the literature, it is relevant to investigate whether political/policy uncertainty
influences information asymmetry in capital markets (Al-Thaqeb and Algharabali 2019;
Dai and Zhang 2019). Furthermore, corporate disclosure plays a critical role in efficient
capital markets because it is an effective means to alleviate information asymmetry.2 There-
fore, this review examines the research on the dynamic relationships among political/policy
uncertainty, corporate disclosure, and information asymmetry in the capital markets.
This review has three aims. First, we propose a framework that illustrates various
mechanisms through which political/policy uncertainty could affect information asymmetry.
Second, a variety of empirical measures have been developed to proxy for political/policy
uncertainty. Our review provides a comparison of these proxies to assist future researchers in
choosing appropriate measures for their studies. Third, the review highlights the positive or
negative mediating role of corporate disclosure and information asymmetry in capital markets.
The framework can be used to identify emerging issues in this fast-growing area of research.
In this review, we first propose a framework of the dynamic relationships among
political/policy uncertainty and information asymmetry. We then review the proxies of
political/policy uncertainty. Next, we review the literature on the impact of political/
policy uncertainty on information asymmetry through its influence on financial analysts’
forecasts. Finally, we review the literature to reveal companies’ disclosure strategies
during periods of heightened political/policy uncertainty and the resulting impact on
information asymmetry in capital markets.
The studies generally suggest that political/policy uncertainty impacts information asym-
metry by affecting the quality of the information in financial analysts’ forecasts and corporate
disclosure. Specifically, political/policy uncertainty decreases the accuracy of analysts’ fore-
casts, which reflects, and arguably contributes to, increased information asymmetry in the cap-
ital markets. However, the evidence for the impact of political/policy uncertainty on corporate
disclosure is mixed. On the one hand, firms are motivated to improve corporate disclosure to
reduce information asymmetry, including asymmetry caused by political/policy uncertainty
(Pastor and Veronesi 2012, 2013; Brogaard and Detzel 2015; Bird et al. 2017; Nagar
et al. 2019; Boone et al. 2020). On the other hand, political/policy uncertainty provides
opportunities for managers to distort financial and nonfinancial information because
unpredictable economic political/policy changes make it more difficult for information users
to assess the quality of corporate disclosure (J. Jin et al. 2019).
2. See Healy and Palepu (2001) for a review.
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RESEARCH METHODOLOGY
This study surveys published journal articles and working papers from the 2009 to 2020
period that focus on the impact of political/policy uncertainty on information asymmetry
in capital markets, corporate disclosure, and information intermediaries. The year 2009 is
selected as the first year of the sample period as this is the first year following the finan-
cial crisis in 2008, which inspired a large number of studies on risk and uncertainty in
the macroeconomic environment. Our process for selecting the articles consists of four
steps. First, we search 64 major accounting and finance journals using the keywords
“political uncertainty” and “policy uncertainty.” Second, we use the same keywords
to search elite economic and business journals that were ranked 4* by the Chartered
Association of Business Schools in 2018. Third, we eliminate articles that do not use
some measure of information asymmetry and corporate disclosure as dependent variables
or develop a measure of political/policy uncertainty. Finally, we search the Social Science
Research Network for recent accounting working papers that meet the above criteria. Our
final sample consists of 43 published journal articles and 8 working papers that examine
the impact of political/policy uncertainty on information asymmetry and corporate
disclosure.
FRAMEWORK
The impact of political/policy uncertainty is observed in a variety of macro- and micro-
economic activities. In the capital markets, one of the activities that is of particular
interest to accounting researchers is corporate disclosure.
The disclosure literature in accounting uses an information asymmetry framework to
examine the determinants that give rise to, the consequences that result from, and the
mechanisms that reduce information asymmetry (Akerlof 1970; Jensen and
Meckling 1976; Healy and Palepu 2001). This information asymmetry framework sug-
gests that information asymmetry between firms and investors impairs the efficiency of
the capital markets and that corporate disclosure plays a vital role in alleviating informa-
tion asymmetry between firms and investors. Information intermediaries such as financial
analysts help investors decipher corporate disclosure and further decrease information
asymmetry.
FIGURE 1 Political/policy uncertainty, corporate disclosure, and information asymmetry

Political/policy Information
uncertainty (3) asymmetry
Quality of
(1a)
information
(2a) (2b) (1b)
Corporate (2c) Properties of

disclosure financial analysts’
forecasts
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Based on our review of the literature, political/policy uncertainty can affect informa-
tion asymmetry through various channels. We summarize these channels in Figure 1.
First, political/policy uncertainty can influence the properties of financial analysts’ fore-
casts (path 1a), which in turn affects the quality of information available in capital mar-
kets (path 1b). Companies respond to the impact of political/policy uncertainty on
information asymmetry by choosing disclosure strategies (path 2a), which directly influ-
ence information quality (path 2b) and indirectly influence information quality through
the properties of financial analysts’ forecasts (path 2c). Finally, political/policy uncer-
tainty can directly or indirectly affect the quality of information flowing into capital mar-
kets through other means (path 3). Paths 2b and 3 are beyond the scope of this literature
review. See Healy and Palepu (2001) for a review of these paths.
Following this conceptual framework, the review focuses on the studies investigating
the impact of political/policy uncertainty on information asymmetry through its influence
on properties of financial analysts’ forecasts and the studies examining the role of corpo-
rate disclosure in meditating the relationship between political/policy uncertainty and
information asymmetry. We discuss both the positive impact of political/policy uncer-
tainty on the quantity and quality of corporate disclosure and the negative effect of politi-
cal/policy uncertainty on corporate disclosure.
MEASUREMENT OF POLITICAL/POLICY UNCERTAINTY

There are six primary measures of political/policy uncertainty used in the literature:
(i) (dis)agreement in forecasts, (ii) political elections and officer turnovers, (iii) legislative
activities, (iv) global political crises, (v) the macro-level economic policy uncertainty
(EPU) index developed by Baker et al. (2016), and (vi) the firm-level political risk mea-
sure constructed by Hassan et al. (2019).
Early studies propose that forecast dispersion, as measured by the dispersion of earn-
ings forecasts, is a valid proxy for uncertainty. Bomberger (1996) provides empirical sup-
port for the assumed relationship between current disagreement and uncertainty about the
future. Buraschi et al. (2014) measure uncertainty with the dispersion of earnings fore-
casts and find that more disagreement in forecasts is associated with greater credit
spreads. In a similar vein, Fan et al. (2020) use (dis)agreement in sentiment among social
media users who jointly mention firms and politicians to gauge firm-level political/policy
uncertainty and find that this measure is associated with stock price volatility and trading
volume. However, disagreement can arise from factors other than political/policy uncer-
tainty, and thus disagreement is a noisy proxy of political/policy uncertainty.
Some studies exploit the variations in political/policy uncertainty associated with
political elections and officer turnovers to more accurately capture the impact of political/
policy uncertainty. Election periods heighten political uncertainty (Julio and Yook 2012;
F. Chen et al. 2018). Thus, researchers treating political elections as exogenous shocks to
political uncertainty have examined the impact of political elections on investment expen-
ditures (Julio and Yook 2012), income-decreasing accrual choices of outsourcing firms
(Ramanna and Roychowdhury 2010), stock prices (Liu et al. 2017), mutual fund
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portfolio management (F. Chen et al. 2018), analyst forecast accuracy (Baloria and
Mamo 2017; Chourou et al. 2021), cost of debt (Waisman et al. 2015), and cost sticki-
ness (Lee et al. 2020).
At the state/gubernatorial level, Jens (2017) uses US gubernatorial elections as a
source of exogenous variation to investigate the association between political uncertainty
and investment (Jens 2017). Atanassov et al. (2019) examine the impact of increased
uncertainty in government policy caused by gubernatorial elections on firm-level R&D.
Çolak et al. (2017) examine IPOs surrounding gubernatorial elections. Gao et al. (2019)
examine how political uncertainty around US gubernatorial elections affects the borrow-
ing costs of local governments. Other studies examine the impact of political uncertainty
on financial disclosure and reporting quality in the setting of gubernatorial elections
(Bird et al. 2017; Boone et al. 2020; Dai and Ngo 2021).
Kim et al. (2019) contend that policy uncertainty arises from high levels of legisla-
tive activity. Hence, they use information in individual congressional bills obtained from
the Congressional Bills Project (http://www.congressionalbills.org/index.html) to con-
struct three measures of political/policy uncertainty based on the number of bills related
to a firm’s industry and the number of bills drafted by local congressmen. Using these
political uncertainty measures, Kim et al. (2019) examine the impact of political uncer-
tainty on firms’ systematic risks and how firms’ political strategies mitigate such impacts.
Another stream of research exploits political movements such as Quebec indepen-
dence as a proxy for political/policy uncertainty. Specifically, Graham et al. (2005) and
Graham et al. (2012) document a “Quebec discount” in firm valuation for Quebec-based
firms due to the Quebec independence movement. Tirtiroglu et al. (2004) show that firms
receive positive market reactions for relocating away from Quebec.
The empirical studies using political elections and legislative activities as exogenous
shocks to political uncertainty face three common challenges. The first is that political
elections and legislative activities only affect political/policy uncertainty in the states,
countries, or regions affected by the activities, which restricts the scope of the studies
and the generalizability of their findings. Second, these studies do not provide clear guid-
ance on the choice of event windows during which political/policy uncertainty is height-
ened. The event windows used in prior studies range from several days to several years
before and/or after political elections. Third, political/policy uncertainty is affected not
only by such high-profile political activities but also by numerous other factors—for
example, abrupt shifts in governmental and public policies in response to the outbreak of
COVID-19 or trade wars under the Trump administration.
To overcome the geographical limitations inherent in using political elections and
legislative activities as proxies for political uncertainty, Bloom (2009) and Huang et al.
(2015) use global crises as the source of global political uncertainty. Prominent examples
of international political crises include “the Gulf War (1990–1991), Yugoslavia vs
Croatia-Slovenia, Bosnia (1992, 1995), Taiwan Strait (1995), September 11th (2001),
North Korea Nuclear (2002, 2006), and Iran Nuclear (2003, 2006) crises” (Huang
et al. 2015, 578). Using these crises as proxies for political uncertainty, Bloom (2009)
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finds that a macro uncertainty shock produces rapid drops and rebounds in aggregate out-
put and employment. Huang et al. (2015) examine the impact of political risk on firms’
payout policies in 35 countries and find that past dividend payers are more likely to ter-
minate dividends and that nonpayers are less likely to initiate dividends during periods of
high political uncertainty.
Baker et al. (2016) construct a newspaper-based macro-level political uncertainty
index (hereafter the BBD index) and apply it to 22 countries, including the United States,
Canada, the United Kingdom, Germany, Italy, France, Australia, Brazil, Mexico, India,
China, South Korea, and Japan.3 The index incorporates three components: (i) a compo-
nent quantifying the newspaper coverage of policy-related economic uncertainty, which
is constructed based on the volume of news articles discussing EPU in 10 large newspa-
pers; (ii) a component reflecting the number of temporary federal tax code provisions set
to expire over the next 10 years according to the Congressional Budget Office reports;
and (iii) a component focusing on the disagreement among economic forecasters regard-
ing future levels of the Consumer Price Index and federal, state, and local expenditures.
The BBD index extends back to 1985 and across countries. It also captures broader polit-
ical/policy uncertainty including elections or crises.
A large body of studies use the BBD index to examine the impact of economic
uncertainty on asset pricing (Brogaard and Detzel 2015), cost of bank loans (Francis
et al. 2014; Ashraf and Shen 2019), debt maturity (Datta et al. 2019), corporate invest-
ment (Gulen and Ion 2016), short-term financing (D’Mello and Toscano 2020), mergers
and acquisitions (N. H. Nguyen and Phan 2017; Bonaime et al. 2018), corporate tax
avoidance (M. Nguyen and Nguyen 2019; Kang and Wang 2021), resource allocation
(Su et al. 2020; Wu et al. 2020; Zeng et al. 2020), financial disclosure quality (Bird
et al. 2017; Jiang et al. 2020; J. Jin et al. 2019; Nagar et al. 2019), voluntary disclosure
quality (Lei and Luo 2021), analyst forecast accuracy (Baloria and Mamo 2017;
Biswas 2019), and the extent of investors’ reliance on sell-side research (Loh and
Stulz 2018).
As a macro-level measure of political/policy uncertainty, the BBD index does not
reflect variations across firms in the level of sensitivity to political/policy uncertainty.
Using textual analysis of quarterly earnings conference-call transcripts, Hassan et al.
(2019) develop a firm-level political risk measure (hereafter the HHLT index). The
HHLT index quantifies the proportion of conversations on conference calls that focus
on risks associated with politics; thus, the measure reflects firms’ self-assessed expo-
sure to political risk. The HHLT index allows researchers to examine the impact of
firm-level political risk on, for example, voluntary disclosure quality (Lei and
Luo 2021).
We summarize the measures of political/policy uncertainty and their limitations in
Table 1.
3. Available at https://www.policyuncertainty.com/all_country_data.html
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94
TABLE 1
Measurements of political/policy uncertainty
Level of
Measurement Created by measurement Used in selected research Limitations
Disagreement n/a Firm level Bomberger (1996), Buraschi et al. (2014), Noisy proxy for political/policy
Fan et al. (2020) uncertainty
Political candidate election n/a National/state National • Only applicable to the geographical
and turnover • Ramanna and Roychowdhury (2010), regions affected by the specific political
Julio and Yook (2012), Piotroski et al. elections or movements
(2015), Waisman et al. (2015), Bradley • Lack of consensus on event windows
et al. (2016), Baloria and Mamo • Failure to capture alternative sources of
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(2017), Liu et al. (2017), F. Chen et al. political/policy uncertainty
(2018), Chan et al. (2020), Chourou
et al. (2021), Lee et al. (2020)
State
• Jens (2017), Çolak et al. (2017), Bird
et al. (2017), Y. Chen et al. (2018),
ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES
Atanassov et al. (2019), Gao et al.

(2019), Dai and Ngo (2021), Boone
et al. (2020)
Legislative activities/bills Kim et al. Industry level Kim et al. (2019)
(2019)
Political movements Graham et al. Country level Tirtiroglu et al. (2004), Graham et al.
(2005) (2012)
International political crisis Huang et al. Macro level Bloom (2009), Huang et al. (2015) • Only applicable to the geographical
(2015) regions affected by specific political
elections or movements
• Lack of consensus on event windows
(The table is continued on the next page.)
TABLE 1 (continued)
Level of
Measurement Created by measurement Used in selected research Limitations
BBD index Baker et al. Macro level Francis et al. (2014), Brogaard and Detzel Does not consider firm-level variations in
(2016) (2015), Gulen and Ion (2016), Baloria sensitivity to political/policy
and Mamo (2017), Bird et al. (2017), uncertainty
J. Chen et al. (2017), N. H. Nguyen
and Phan (2017), Bonaime et al.
(2018), Loh and Stulz (2018), Ashraf
and Shen (2019), Biswas (2019), Datta
et al. (2019), X. Jin et al. (2019), J. Jin
et al. (2019), Nagar et al. (2019),
M. Nguyen and Nguyen (2019),
D’Mello and Toscano (2020), Jiang
et al. (2020), Kang and Wang (2021),
Kaviani et al. (2020), Su et al. (2020),
Zeng et al. (2020), Cui et al. (2021),
Lei and Luo (2021)
HHLT index Hassan et al. Firm level Hassan et al. (2019), Lei and Luo (2021) Available since 2001 on monthly basis
(2019)
POLICY UNCERTAINTY AND CORPORATE DISCLOSURE
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95
IMPACT OF POLITICAL/POLICY UNCERTAINTY ON INFORMATION

ASYMMETRY IN THE CAPITAL MARKETS
Recent studies show that political/policy uncertainty increases information asymmetry in
the capital markets. The framework presented in Figure 1 suggests that one of the chan-
nels for this influence is financial analysts’ forecasts. Specifically, political/policy uncer-
tainty affects the properties of financial analysts’ forecasts and thus the quality of
information available to market participants.
Quality of Information
Political/policy uncertainty can have direct effects on the quality of information. Zhang
(2006) suggests that political/policy uncertainty reduces the reliability of firm informa-
tion. Consistent with this notion, Jiang et al. (2020) show that political/policy uncertainty
increases the tone of uncertainty and negativity in corporate disclosure, and this effect is
stronger for firms with higher government policy sensitivity.
Firm disclosures could also be less relevant during times of high political/policy
uncertainty because firms often adjust real activities in response to high political/policy
uncertainty. For example, N. H. Nguyen and Phan (2017) and Bonaime et al. (2018) find
that political/policy uncertainty reduces merger and acquisition activities; Julio and Yook
(2012) and Jens (2017) show that firms reduce investment expenditures when political/
policy uncertainty is high; and Çolak et al. (2017) document that political/policy uncer-
tainty dampens IPO activities. Baloria and Mamo (2017) document that such changes in
firm strategies and practices are unlikely to be reflected in time-series patterns or past
accounting accruals, which undermines the relevance of current-period firm disclosures.
When a firm’s disclosures become less relevant and reliable, information asymmetry is
heightened.
Properties of Financial Analysts’ Forecasts

One of the channels through which political/policy uncertainty affects information asym-
metry in capital markets is through financial analysts. Financial analysts play a significant
role in reducing the information asymmetry between firms and information users by issu-
ing analyst forecasts based on corporate disclosures and a range of public and private
information (Bushman et al. 2004; Lang et al. 2004; Loh and Mian 2006; Livnat and
Zhang 2012; Baloria and Mamo 2017). The low-quality information available to analysts
during periods of high political/policy uncertainty inevitably results in less accurate and
more disperse forecasts, thereby exacerbating information asymmetry.
Consistent with such concerns, Huang et al. (2015) find that global political crises
increase analyst forecast dispersion. Loh and Stulz (2018) document that the heightened
uncertainty during economic recessions is associated with lower accuracy and less con-
vergence in financial analyst forecasts. Baloria and Mamo (2017), Biswas (2019), and
Chourou et al. (2021) find that analyst forecast accuracy decreases and forecast disper-
sion increases in the presence of policy uncertainty; the negative association between
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policy uncertainty and forecast accuracy is more pronounced when firms are more sensi-
tive to policy uncertainty.
In summary, political/policy uncertainty increases information asymmetry in capital
markets by impairing the quality of information flowing into the markets and has nega-
tive capital market consequences (Pastor and Veronesi 2012, 2013; Brogaard and
Detzel 2015; Bird et al. 2017; Nagar et al. 2019; Boone et al. 2020). Furthermore, as
information users tend to rely more heavily on processed information offered by financial
analysts during times of uncertainty (Loh and Stulz 2018), the indirect effect of political/
policy uncertainty on information asymmetry through financial analysts could be at least
as significant as the direct impact of political/policy uncertainty on information asymme-
try. We summarize the primary findings of the studies on the impact of political/policy
uncertainty on information asymmetry in Table 2.
TABLE 2
Impact of political/policy uncertainty on information asymmetry
Panel A: Quality of information
Authors Journal Primary findings

Baloria and Working paper Policy uncertainty results in less accurate earnings in
Mamo (2017) forecasts. The effect is more pronounced for firms
sensitive to policy uncertainty
Jiang et al. (2020) Working paper Policy uncertainty increases the tone of uncertainty and
negativity. The tone effect is stronger for firms with
higher government policy sensitivity
Panel B: Properties of financial analysts’ forecasts

Huang et al. (2015) Journal of Past dividend payers are more likely to terminate
International dividends, and nonpayers are less likely to initiate
Business Studies dividends during periods of high political risk. The effect
is stronger for multinational companies but can be
attenuated by more stable political systems and stronger
investor legal protection
Baloria and Working paper Policy uncertainty reduces forecast accuracy, and the
Mamo (2017) negative association is more pronounced for policy-
sensitive firms
Loh and Stulz (2018) Journal of Finance Analyst revisions have a larger stock price impact and
analyst reports are more frequent and longer in bad
times, suggesting that analysts work harder and investors
rely more on analysts in bad times
Biswas (2019) Working paper EPU increases analyst forecast errors, and the effect is
stronger for firms that are more sensitive to EPU
Chourou et al. (2021) Journal of Analysts’ forecast errors increase with EPU, as does the
Accounting degree of forecast dispersion
and Public Policy
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IMPACT OF POLITICAL/POLICY UNCERTAINTY ON CORPORATE DISCLOSURE

Building on the evidence that political/policy uncertainty heightens information asymme-
try, some studies investigate the mechanisms that could alleviate or aggravate the infor-
mation asymmetry caused by political/policy uncertainty. As the role of corporate
disclosure in alleviating information asymmetry is well documented in the accounting lit-
erature, there is a particularly robust stream of research on the relationships between
political/policy uncertainty, corporate disclosure, and information asymmetry.
Corporate disclosures are provided in variety of formats, including regulated financial
reports and other regulatory filings as well as voluntary communication. In this section,
we review the studies examining the impact of political/policy uncertainty on both man-
datory and voluntary corporate disclosure.
An effective method for mitigating information asymmetry is to increase the quantity
of corporate disclosure (Diamond 1985; Diamond and Verrecchia 1991; Cheynel 2013)
and improve disclosure quality (Lambert et al. 2007; Y. Chen et al. 2018). F. Chen et al.
(2018) show that during times of political uncertainty, mutual fund managers rebalance
their portfolios toward stocks with greater financial reporting quality, which is direct evi-
dence of investors’ demand for better information disclosure under this condition. How-
ever, this review demonstrates that political/policy uncertainty can have a range of effects
on corporate disclosure, which have different implications for information asymmetry.
Positive Impact of Political/Policy Uncertainty on the Quantity of Disclosure

Empirical studies show that firms increase the quantity of disclosures during periods of
heightened political/policy uncertainty. Nagar et al. (2019) find that the average EPU
level for a given quarter is positively associated with the frequency of management fore-
casts and voluntary 8-K filings in the following quarter. Similarly, Bird et al. (2017) doc-
ument that when EPU levels are high, firms increase the frequency and length of 8-K
filings and include more exhibits or press releases; firms are also more likely to issue
management forecasts, especially precise point forecasts. Boone et al. (2020) show that
firms respond to the heightened policy uncertainty created by gubernatorial elections by
providing more frequent, informative, and transparent voluntary disclosure, and such
increases in voluntary disclosure are greater for firms with more investment and higher
external demand for information (i.e., more analyst following and institutional owner-
ship). Jiang et al. (2020) find that EPU is positively related to the quantity (in terms of
the length) of textual disclosures in SEC filings (e.g., 10-K, 10-Q, and 8-K filings). In
turn, such increased corporate disclosure spurs more frequent, more accurate, and less
dispersed analyst forecasts (Bird et al. 2017).
Positive Impact of Political/Policy Uncertainty on the Quality of Disclosure

Given the evidence for an increase in the quantity of disclosure under political/policy
uncertainty, it is important to ask if more is always better. Jiang et al. (2020, 2) find that
political/policy uncertainty “may force managers to use lengthy and more complicated
words to explain the difficulty and uncertainty they currently face.” Therefore, it is
AP Vol. 22 No. 1 — PC vol. 22, n 1 (2023)
equally important to examine the impact of political/policy uncertainty on the quality of

corporate disclosure.
The empirical evidence for the impact of political/policy uncertainty on disclosure
quality is mixed. Some studies show that political/policy uncertainty is associated with
more transparent and more timely disclosure. Specifically, Ramanna and Roychowdhury
(2010) document that politically connected firms with more outsourcing activities made
more income-decreasing accounting choices during the 2004 US general elections. Kim
et al. (2019) demonstrate that managers disclose bad earnings news in a timelier manner
when EPU is greater in order to mitigate the increased litigation risk associated with
lower stock pricing during times of uncertainty. Dai and Ngo (2021) show that the asym-
metric timeliness of news recognition increases with political uncertainty; the effect is
more pronounced for firms in states with lower electoral participation, with greater indus-
try exposures to contracting needs, with higher leverage and lower managerial ownership,
and with stronger internal corporate governance mechanisms. In addition, Lei and Luo
(2021) examine EPUs’ impact on the nonfinancial disclosure of political contributions
and show that companies facing higher EPU make more transparent corporate political
disclosure to reduce the information asymmetry associated with the political/policy
uncertainty.
Negative Impact of Political/Policy Uncertainty on the Quantity and Quality of

Disclosure
In spite of the positive impacts of political/policy uncertainty on corporate disclosure dis-
cussed above, political/policy uncertainty also provides managers with opportunities to
distort information to serve their private interests (X. Jin et al. 2019; Nagar et al. 2019).
Piotroski et al. (2015) document that politically affiliated firms temporarily suppress neg-
ative information in response to major political events. Y. Chen et al. (2018) find that
politically dependent firms reduce the amount and the quality of information provided to
investors during periods of political uncertainty. Focusing on a sample of US banks,
X. Jin et al. (2019) find that EPU is positively related to earnings opacity proxied by the
magnitude of discretionary loan loss provisions and the likelihood of just meeting or
beating the prior year’s earnings but is negatively related to the level of accounting con-
servatism. They argue that this is because unpredictable economic policy changes make
it more difficult to detect the existence and impact of hidden “adverse news.” Further-
more, accounting numbers disclosed in financial statements often involve estimates and
judgments. While how firms reach the estimates or judgments is clearly disclosed in
financial statements under certain circumstances, many such explanations are not,
thus providing managers with earnings management opportunities. More volatile earnings
and cash flows during periods of heightened EPU may disguise earnings management
from external information users. Using a set of comprehensive SEC filings (i.e., 10-K,
10-Q, and 8-K filings), including both mandatory and voluntary disclosures, Jiang et al.
(2020) find that the readability of corporate disclosure is lower when EPU is high. Cui
et al. (2021) document that EPU increases firms’ earnings management.
AP Vol. 22 No. 1 — PC vol. 22, n 1 (2023)

Cost-Benefit Trade-Offs
It is noteworthy that corporate disclosure decisions are ultimately the outcome of
weighing costs and benefits. Higher-quality corporate disclosure inevitably reveals impor-
tant firm information to industry peers (Bamber and Cheon 1998; Verrecchia and
Weber 2006; Cao et al. 2018). This is consistent with the findings of Boone et al. (2020),
who show that firms respond to heighted policy uncertainty by providing more frequent,
informative, and transparent voluntary disclosure, but the increases in voluntary disclo-
sure are weaker for firms with higher proprietary disclosure costs. Lei and Luo (2021)
find that firms mitigate the heightened information asymmetry associated with higher
aggregate EPU by increasing transparency in their disclosure of corporate political contri-
butions; however, they are less likely to pursue this strategy when proprietary costs
are high.
In addition to changing disclosure practices to mitigate the information asymmetry
generated by political/policy uncertainty, firms can reduce political/policy uncertainty
directly through lobbying, hiring board members with political backgrounds, and making
political contributions (Faccio et al. 2006; Goldman et al. 2009; Igan et al. 2012; Bradley
et al. 2016). When political connections mitigate political uncertainty, the demand for
higher-quality disclosure and better financial reporting quality is lower. For example,
Bradley et al. (2016) find that the earnings quality of politically connected firms is lower
because connected firms can afford the costs of lower disclosure quality such as
costly debt financing, and Baloria (2015) shows that politician-owned firms adopt less
conservative accounting due to lower contracting demand.
In summary, political/policy uncertainty motivates managers to provide higher-
quality information to the capital market to alleviate information asymmetry, but
political/policy uncertainty also provides managers with opportunities to engage in
opportunistic disclosure. Furthermore, managers may refrain from making more transpa-
rent disclosure and reporting due to concerns over proprietary costs. We summarize the
primary findings of the studies on the impact of political/policy uncertainty on corporate
disclosure in Table 3.
SUGGESTIONS FOR FUTURE RESEARCH

This paper provides a timely review of the research on the impact of political/policy
uncertainty on corporate disclosure and information asymmetry in capital markets. Our
review suggests that companies may strategically change their disclosure practices during
periods of heightened political/policy uncertainty to mitigate the impact of political/
policy uncertainty on information asymmetry or to meet their self-serving objectives.
Ultimately, corporate disclosure decisions are the outcome of balancing the costs and
benefits of the increased disclosure. Building on the research reviewed in this study, we
suggest seven areas for future research that will help us to better understand the impact
of political/policy uncertainty.
First, although a robust stream of research has established that political/policy uncer-
tainty has a profound impact at both the macro and the micro levels, some of the studies
AP Vol. 22 No. 1 — PC vol. 22, n 1 (2023)
TABLE 3
Impact of political/policy uncertainty on corporate disclosure
Panel A: Positive impact on quantity of disclosure

Bird et al. (2017) Working paper Voluntary disclosure, measured by the frequency and
content of voluntary 8-K filings and managerial
guidance, increases prior to a close election as the
level of political uncertainty is high and reverses after
the election when the uncertainty is resolved. Political
uncertainty also increases trading costs and reduces
analyst information production. Firms attempt to
mitigate the negative impact of political uncertainty
by increasing transparency
Nagar et al. (2019) Journal of Government EPU increases bid-ask spreads and
Accounting decreases stock price reactions to earnings surprises.
and Economics Increased voluntary disclosures partly mitigate the
impact of EPU
Boone et al. (2020) Working paper Heightened policy uncertainty negatively affects the
market quality of local firms. Firms respond by
providing more frequent and informative voluntary
disclosures to investors and analysts. The effect is
stronger for firms with more investment, higher
external demand for information, and lower
proprietary disclosure costs
Jiang et al. (2020) Working paper Policy uncertainty increases textual disclosure length.
The length effect is stronger for firms with high
institutional ownership and post-SOX filing
Panel B: Positive impact on quality of disclosure

Ramanna and Journal of Firms politically connected to US congressional
Roychowdhury Accounting candidates with more extensive outsourcing activities
(2010) Research have more income-decreasing discretionary accruals
during the 2004 election cycle
Kim et al. (2019) Managers disclose bad earnings news in a timelier
manner when EPU is greater in order to mitigate the
increased litigation risk associated with lower stock
pricing during times of uncertainty
Dai and Ngo (2021) European Political uncertainty increases accounting conservatism,
Accounting and the effect is more pronounced for firms in states
Review with lower electoral participation, with greater industry
exposures to contracting needs, with higher leverage
and lower managerial ownership, and with stronger
internal corporate governance mechanisms
(The table is continued on the next page.)
AP Vol. 22 No. 1 — PC vol. 22, n 1 (2023)

TABLE 3 (continued)
Panel B: Positive impact on quality of disclosure

Lei and Luo (2021) Working paper Firms facing higher aggregate EPU make more
transparent corporate political disclosure. The effect is
more pronounced for firms that more actively manage
EPU through corporate political contributions and
weaker for firms with higher levels of exposure to
political risk. Corporate political disclosure
transparency has a significant moderating effect on
the negative association between aggregate EPU and
future stock returns
Panel C: Negative impact on corporate disclosure

Piotroski et al. (2015) Journal of Politically affiliated Chinese firms temporarily suppress
Accounting negative information around visible political events,
and Research which decreases the probability of stock price crashes
during the event windows but increases the
probability of crashes after such events
Y. Chen et al. (2018) Journal of The total amount of idiosyncratic information about a
Accounting firm that is available to the market is reduced during
and Public Policy periods of political uncertainty for politically
dependent firms. Furthermore, firms reduce the
amount and the quality of information provided to
investors. Information intermediaries partly moderate
the negative effect of political uncertainty
J. Jin et al. (2019) Journal of EPU increases earnings opacity among US banks
Accounting
and Public Policy
Cui et al. (2021) Accounting EPU increases firms’ earnings management. The effect
and Finance is stronger for firms with weaker external monitoring
Jiang et al. (2020) Working paper Policy uncertainty lowers readability and increases the
tone of uncertainty and negativity. Tough external
monitoring mitigates the readability effect, and the
tone effect is more pronounced for firms that have
high government policy sensitivity or high stock price
synchronicity
indicate that the impact of political/policy uncertainty varies across firms (Baker
et al. 2016). Future studies could investigate the factors that moderate the impact of polit-
ical/policy uncertainty on corporate disclosure and information asymmetry. For instance,
firms often engage in political activities such as political contributions and lobbying to
manage the risk arising from political/policy uncertainty (Faccio et al. 2006; Bradley
AP Vol. 22 No. 1 — PC vol. 22, n 1 (2023)

et al. 2016). Are these activities effective in mitigating the negative impact of political/
policy uncertainty on firms’ information environment?
Second, managerial incentive is an important determinant of firms’ disclosure deci-
sions. As managers usually possess superior private information, they can strategically
disclose firm information to enhance their own interests (Kothari et al. 2009). Political/
policy uncertainty discourages transparent corporate disclosure and helps disguise oppor-
tunistic disclosure (Piotroski et al. 2015; Y. Chen et al. 2018; J. Jin et al. 2019). Future
research can explore the interactions among political/policy uncertainty, managerial
opportunism, and corporate disclosure so as to shed light on how to design managerial
incentives that protect investors and other information users.
Third, F. Chen et al. (2018) show that during times of high political uncertainty,
mutual fund managers who focus on local markets rebalance their portfolios toward
stocks with greater financial reporting quality. Future research might examine the
responses of other stakeholders—for example, creditors, financial analysts, and audi-
tors—to macro-level or firm-level political/policy uncertainty. Particularly, studies show
that political/policy uncertainty affects financial analysts’ forecasts. It would be interest-
ing to investigate financial analysts’ responses. In addition, as investors are the key par-
ticipants in the capital market, future studies could further investigate the dynamic
relationship among political/policy uncertainty, trading activities in the stock and debt
market such as bid-ask spreads (Tung 2000), and corporate disclosure. Moreover, studies
document that firms can either improve disclosure to mitigate the negative impact of
political/policy uncertainty (Nagar et al. 2019) or exploit political/policy uncertainty to
distort disclosure (J. Jin et al. 2019). It would be interesting to examine whether stake-
holders appreciate the improvements or detect such distortions.
Fourth, political/policy uncertainty affects firm information environments around the
world. However, most of literature focuses on political/policy uncertainty in the
United States. A notable exception is the body of research on the impact of the Quebec
independence movement (Tirtiroglu et al. 2004; Graham et al. 2005, 2012). These studies
document the generally negative impact of the political/policy uncertainty related to
Quebec’s independence movement on firm value and market reactions. Future studies
can expand this line of research by examining the determinants and consequence of polit-
ical/policy uncertainty in international settings and firms’ responses to mitigate such
effects.
Fifth, studies suggest that some firms improve disclosure to mitigate political uncer-
tainty (Nagar et al. 2019), while others take advantage of political uncertainty to distort
information (Y. Chen et al. 2018). It would be interesting to design research to differenti-
ate the two types of firms and investigate the consequences of the two opposite disclosure
strategies. Prior studies also find that disclosure tends to be more lengthy and less read-
able when the level of political/policy uncertainty is high (Jiang et al. 2020; J. Jin
et al. 2019). This echoes the concerns of the SEC (2013) and FASB (2012) initiatives
that excessive, complex, and redundant disclosure may exacerbate information asymme-
try in the capital market. Future research could investigate whether the more complicated
AP Vol. 22 No. 1 — PC vol. 22, n 1 (2023)

disclosures generated by high levels of political/policy uncertainty increase or reduce

information asymmetry.
Sixth, this review has interesting implications for the policymaking process. On
the one hand, lengthy policy/political debates could have negative impacts on compa-
nies’ operational activities such as mergers and acquisitions (N. H. Nguyen and
Phan 2017; Bonaime et al. 2018), financing activities (Çolak et al. 2017; Jens 2017;
Bonaime et al. 2018), and investments (Jens 2017; Z. Chen et al. 2018). On the other
hand, open and transparent policy-making processes are necessary for ensuring the
fairness and effectiveness of government policies. Hence, insights on how to balance
efficiency and transparency in policy-making processes would be of great benefit to
society.
Furthermore, the literature on corporate disclosure during times of heightened politi-
cal/policy uncertainty assumes that the uncertainty increases the information advantage of
company insiders. Since political/policy uncertainty complicates companies’ decision-
making (Bloom 2009; Baker et al. 2016; M. Nguyen and Nguyen 2019), it might instead
weaken the information advantage of company insiders. Future studies could explore
whether political/policy uncertainty provides an information advantage to some groups of
outsiders who possess superior knowledge and skills, such as institutional investors with
political connections.
CONCLUSIONS
In recent decades, political/policy uncertainty has had a significant impact on informa-
tion asymmetry and corporate disclosure and has influenced companies’ operations,
investments, and financial decisions. This review of the literature synthesizes the empir-
ical measures of political/policy uncertainty and current research on the dynamic rela-
tionships among political/policy uncertainty, corporate disclosure, and information
asymmetry in capital markets. The reviewed studies provide evidence that political/
policy uncertainty affects the quantity and quality of information in capital markets by
influencing corporate disclosure and financial analysts’ forecasts, thereby influencing
information asymmetry between companies and information users and among informa-
tion users. The review contributes to the accounting literature by connecting the litera-
ture on political/policy uncertainty with the literature on corporate disclosure.
Specifically, it shows that corporate disclosure is an important mediator of the associa-
tion between political/policy uncertainty and information asymmetry. The findings
should be useful for (i) researchers who are interested in advancing research in this
area, (ii) information preparers who seek insights on how to improve corporate disclo-
sure in response to political/policy uncertainty, and (iii) regulators who aim to constrain
opportunistic disclosure by managers.
AP Vol. 22 No. 1 — PC vol. 22, n 1 (2023)

APPENDIX: EXAMPLES OF CORPORATE DISCLOSURES

ABOUT POLITICAL/POLICY UNCERTAINTY
AT&T (10-K, 2018)

https://otp.tools.investis.com/clients/us/atnt2/sec/sec-show.aspx?Type=html&FilingId=
13241251&CIK=0000732717&Index=10000
• Our increased exposure to foreign economies, including foreign exchange fluctua-
tions as well as regulatory and political uncertainty.
• The uncertainty surrounding further congressional action to address spending
reductions, which may result in a significant decrease in government spending and
reluctance of businesses and consumers to spend in general.
AT&T (Annual report, 2020)

https://investors.att.com//media/Files/A/ATT-IR/financial-reports/annual-reports/2020/
complete-2020-annual-report.pdf
There are a number of uncertainties that could impact our future results of operations.
. . . We expect our 2021 results to be impacted by the following:
• Lower revenues from the continued partial closure of movie theaters and higher
costs based on our decision to distribute 2021 films on HBO Max in the U.S.
simultaneous with theaters for 31 days and costs associated with the international
launch of HBO Max.
• Uncertainty in revenues from international wireless roaming services due to
reduced travel, particularly in the first quarter.
General Motors (10-K, 2018)

https://www.sec.gov/Archives/edgar/data/1467858/000146785819000033/gm201810k.htm
We are subject to the tax laws and regulations of the United States and numerous other
jurisdictions in which we do business. Many judgments are required in determining our
worldwide provision for income taxes and other tax liabilities, and we are regularly under
audit by the U.S. Internal Revenue Service and other tax authorities, which may not
agree with our tax positions. In addition, our tax liabilities are subject to other significant
risks and uncertainties, including those arising from potential changes in laws and/or
regulations in the countries in which we do business, the possibility of adverse determi-
nations with respect to the application of existing laws, and changes in the valuation of
our deferred tax assets and liabilities. Any unfavorable resolution of these and other
uncertainties may have a significant adverse impact on our tax rate. For example, the
impact of the U.S. Tax Cuts and Jobs Act of 2017 (the Tax Act), which was enacted
on December 22, 2017, may differ from the Company’s previously recorded amounts,
possibly materially, due to potential changes in the Tax Act (including with respect to
the regulations promulgated thereunder) or changes to its interpretation. If our tax
expenses were to increase, or if the ultimate determination of our taxes owed is for an
AP Vol. 22 No. 1 — PC vol. 22, n 1 (2023)
amount in excess of amounts previously accrued, our operating results, cash flows and
financial condition could be adversely affected.
Intel (10-K, 2018)

https://www.sec.gov/Archives/edgar/data/50863/000005086319000007/a12292018q4-
10kdocument.htm
We may be adversely affected by other global and regional factors, including:
• geopolitical and security issues, such as armed conflict and civil or military unrest,
political instability, human rights concerns, and terrorist activity;
• formal or informal imposition of new or revised export, import, or doing-business
regulations, including trade sanctions and tariffs, which could be changed without
notice;
• government restrictions on, or nationalization of our operations in any country, or
restrictions on our ability to repatriate earnings from a particular country;
• continuing uncertainty regarding social, political, immigration, and tax and trade
policies in the U.S. and abroad, including as a result of the United Kingdom’s vote
to withdraw from the European Union; and
• fluctuations in the market values of our domestic and international investments,
which can be negatively affected by liquidity, credit deterioration or losses, interest
rate changes, financial results, political risk, sovereign risk, or other factors.
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2022 - Lei - Political Policy Uncertainty Corporate Disclosure and Information Asymmetry

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Political/Policy Uncertainty, Corporate

Disclosure, and Information Asymmetry*

INCERTITUDE POLITIQUE/STRATÉGIQUE, DIVULGATION D’INFORMATION

changements stratégiques à leurs pratiques de divulgation d’information pendant les

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2. See Healy and Palepu (2001) for a review.

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FIGURE 1 Political/policy uncertainty, corporate disclosure, and information asymmetry

(2a) (2b) (1b)

Corporate (2c) Properties of

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MEASUREMENT OF POLITICAL/POLICY UNCERTAINTY

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Atanassov et al. (2019), Gao et al.

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IMPACT OF POLITICAL/POLICY UNCERTAINTY ON INFORMATION

Properties of Financial Analysts’ Forecasts

Authors Journal Primary ﬁndings

Panel B: Properties of ﬁnancial analysts’ forecasts

Authors Journal Primary ﬁndings

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IMPACT OF POLITICAL/POLICY UNCERTAINTY ON CORPORATE DISCLOSURE

Positive Impact of Political/Policy Uncertainty on the Quantity of Disclosure

Positive Impact of Political/Policy Uncertainty on the Quality of Disclosure

equally important to examine the impact of political/policy uncertainty on the quality of

Negative Impact of Political/Policy Uncertainty on the Quantity and Quality of

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SUGGESTIONS FOR FUTURE RESEARCH

Authors Journal Primary ﬁndings

Panel B: Positive impact on quality of disclosure

Authors Journal Primary ﬁndings

(The table is continued on the next page.)

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Authors Journal Primary ﬁndings

Panel C: Negative impact on corporate disclosure

Authors Journal Primary ﬁndings

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disclosures generated by high levels of political/policy uncertainty increase or reduce

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APPENDIX: EXAMPLES OF CORPORATE DISCLOSURES

AT&T (10-K, 2018)

AT&T (Annual report, 2020)

General Motors (10-K, 2018)

Intel (10-K, 2018)

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