Disclosure and liquidity management: Evidence from regulation fair disclosure

We examine the effect of the firm's information environment on its liquidity policy by exploiting a natural experiment involving Regulation Fair Disclosure (Regulation FD). We find, on average, Regulation FD has a negative impact on firm cash holdings. We also directly evaluate changes in firm disclosure policy and find the negative Regulation FD-cash holdings relation is stronger for firms that increased public disclosure and holds largely for firms that faced lower proprietary costs of public disclosure. Furthermore, we find this negative relation is more pronounced for firms with limited access to the credit market. We capture the medium-term effect of Regulation FD two years before and two years after the implementation. Overall, our results suggest that the change in the amount of information disclosed in response to Regulation FD, an externality effect, affects information asymmetry between firms and outside investors and thus cash holdings.