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

See all articles by Rui A. Albuquerque

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Shiyun Song

The Vanguard Group, Inc.

Chen Yao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 6, 2020

Abstract

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

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

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Shiyun Song

The Vanguard Group, Inc. ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

Chen Yao

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
Shatin, N.T.
Hong Kong
852 39433215 (Phone)

HOME PAGE: http://sites.google.com/site/chenyaosite/research

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