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.

Prior literature finds that staggered state-level adoption of the Inevitable Disclosure Doctrine (IDD) significantly constrains labor mobility. Using the IDD as an exogenous shock to labor mobility, we find that firms headquartered in states that adopt the IDD gravitate towards issuing short-term debt for external debt financing. We examine three mechanisms—default risk, information asymmetry, and agency cost mitigation—through which labor mobility restrictions affect debt maturity. Our results provide support for the information asymmetry mechanism, which suggests that firms are more inclined to use short-term debt when their information environment deteriorates. We find that in the wake of IDD adoption, firms tend to utilize short-term debt only in corporate bond markets and their debt maturity profiles become more concentrated.