The Tick Size and Stock Price Informativeness: Evidence from Investment–q Sensitivity

Posted: 4 Feb 2020 Last revised: 3 Aug 2021

See all articles by Mao Ye

Mao Ye

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Miles Zheng

University of Illinois at Urbana-Champaign - Department of Finance

Wei Zhu

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: December 1, 2019

Abstract

We study the effects of the tick size on stock price informativeness about future investment. Using the Tick Size Pilot Program as a controlled experiment, we find that an increase in the tick size increases the strength of Tobin’s q (a standardized measure of prices) to predict future investment. The increase in investment–q sensitivity is concentrated in firms that experience a reduction in the magnitude of market reactions to earnings announcements, an increase of EDGAR downloading volume, or a reduction in algorithmic trading. These findings suggest that a wider tick size increases the acquisition of information on firm fundamentals and consequently price informativeness about future investment decisions. The investment–q sensitivity also increases more when managers have stronger incentives to learn from stock prices, suggesting that some of the added information with a wider tick size is new to managers and therefore has a real effect on corporate investments.

Keywords: tick size; stock price informativeness; investment; Tobin’s q; managerial learning; feedback effect

JEL Classification: G14, G31

Suggested Citation

Ye, Mao and Zheng, Miles and Zhu, Wei, The Tick Size and Stock Price Informativeness: Evidence from Investment–q Sensitivity (December 1, 2019). Available at SSRN: https://ssrn.com/abstract=3517305 or http://dx.doi.org/10.2139/ssrn.3517305

Mao Ye (Contact Author)

University of Illinois at Urbana-Champaign ( email )

406 Wohlers
1206 South 6th Street
Champaign, IL 61820
United States
2172440474 (Phone)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Miles Zheng

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Wei Zhu

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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