Working Paper: CEPR ID: DP12486
Authors: Rui Albuquerque; Shiyun Song; Chen Yao
Abstract: This paper studies the SEC’s pilot program that increased the tick size for approximately 1,200 randomly chosen stocks. We provide causal evidence of a negative impact of a larger tick size on stock prices equivalent to roughly $7 billion investor loss. We investigate direct and indirect effects of the tick size change on stock prices. We find that treated stocks experience a reduction in liquidity, but find no significant change in liquidity risk. Test stocks experience a decline in price efficiency consistent with an increase in information risk. The evidence suggests that trading frictions affect the cost of capital.
Keywords: Tick size; Pilot program; Liquidity; Price efficiency; News response rate; Liquidity risk; Liquidity premium; Information risk; Investor horizon; Jobs Act
JEL Codes: G10; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger tick size (F31) | Lower stock prices (G19) |
| Larger tick size (F31) | Cumulative abnormal return decline (C22) |
| Larger tick size (F31) | Reduction in liquidity (G33) |
| Cumulative abnormal return decline (C22) | Lower stock prices (G19) |
| Larger tick size (F31) | No significant change in liquidity risk (G33) |
| Additional trading constraints (F14) | No significant price effect (D41) |