The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment
68 Pages Posted: 7 Dec 2017 Last revised: 16 May 2019
Date Written: May 14, 2019
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 approx- imately 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 Program, Liquidity, Price Efficiency, News Response Rate, Liquidity Risk, Liquidity Premium, Information Risk, Investor Horizon, JOBS Act
JEL Classification: G10, G14
Suggested Citation: Suggested Citation