The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment
71 Pages Posted: 7 Dec 2017 Last revised: 7 Apr 2020
Date Written: April 6, 2020
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