The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment

Do stock prices of publicly listed companies respond to changes in transaction costs? Using the SEC’s pilot program that increased the tick size for approximately 1,200 randomly chosen stocks, we find a stock price decrease between 1.75% and 3.2% for small spread stocks affected by the larger tick size relative to a control group. We find that the increase in the present value of transaction costs accounts for a small percentage of the price decrease. We study channels of price variation due to changes in expected returns: information risk, investor horizon, and liquidity risk. The evidence suggests that trading frictions affect the cost of capital.

Keywords: tick size pilot, liquidity, information risk, price efficiency, news re- sponse, investor horizon, liquidity risk, liquidity premium, cost of capital, JOBS Act, SEC

JEL Classification: G12, G14, G18

Suggested Citation: Suggested Citation

Albuquerque, Rui A. and Song, Shiyun and Yao, Chen, The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment (April 6, 2020). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3081125 or http://dx.doi.org/10.2139/ssrn.3081125