Market Structure and Corporate Payout Policy: Evidence from a Controlled Experiment

Abstract

In 2016, the Securities and Exchange Commission (SEC) increased tick size for 1,200 randomly selected firms. We find tick-constrained firms reduce repurchase payouts by 45% during the two-year pilot period. Their dividend payouts do not change much, total payouts reduce by 31% and payout structure changes from repurchase-dominating towards half-half. In contrast, unconstrained firms do not experience significant changes in payouts. The conflicts between rule 10b-18 and the newly imposed trade-at rule which restricts dark-pool trading for test group 3 contribute to a larger reduction in repurchases. The effect of the pilot on share repurchases reverts after Pilot ends.

Keywords: tick size, dark pool, payout policy, regulation, market liquidity

JEL Classification: G10, G18, G35