The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment
70 Pages Posted: 7 Dec 2017 Last revised: 15 Sep 2019
Date Written: September 13, 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, liquidity, information risk, price efficiency, news re- sponse, investor horizon, liquidity risk, liquidity premium, cost of capital, JOBS Act, SEC
JEL Classification: G10, G14
Suggested Citation: Suggested Citation