Tick Size Tolls: Can a Trading Slowdown Improve Earnings News Discovery?

59 Pages Posted: 11 Nov 2018 Last revised: 7 Jul 2020

See all articles by Charles M.C. Lee

Charles M.C. Lee

Stanford University - Graduate School of Business

Edward M. Watts

Yale School of Management

Date Written: October 9, 2018

Abstract

This study examines how an increase in tick size affects algorithmic trading (AT), fundamental information acquisition (FIA), and the price discovery process around earnings announcements (EAs). Leveraging the SECs randomized Tick Size Pilot experiment, we show a tick size increase results in a decline in AT and a sharp drop in absolute cumulative abnormal returns and volume around EAs. More importantly, we find increased FIA in the preannouncement period. Specifically, we show: (a) treatment firms pre-announcement returns better anticipate next quarters standardized unexpected earnings; (b) these firms experience an increase in EDGAR web traffic prior to EAs; and (c) they exhibit a drop in price synchronicity with index returns. Taken together, our evidence suggests that while an increase in tick size reduces AT and abnormal market reaction after EAs, it also increases FIA activities prior to EAs.

Keywords: Earnings Announcements, Price Informativeness, Information Acquisition, Price Discovery, Market Efficiency, Tick Size Pilot, Algorithmic Trading

JEL Classification: M40, M41, G12, G14

Suggested Citation

Lee, Charles M.C. and Watts, Edward, Tick Size Tolls: Can a Trading Slowdown Improve Earnings News Discovery? (October 9, 2018). Stanford University Graduate School of Business Research Paper No. 19-1, The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3263778 or http://dx.doi.org/10.2139/ssrn.3263778

Charles M.C. Lee (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Edward Watts

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

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