The Effect of Tick Size on Managerial Learning from Stock Prices

50 Pages Posted: 4 Feb 2020 Last revised: 19 May 2022

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: May 18, 2022

Abstract

We investigate the effect of tick size, a key feature of market microstructure, on managerial learning from stock prices. Using a randomized controlled tick-size experiment, the 2016 Tick Size Pilot Program, we find that a larger tick size increases a firm’s investment sensitivity to stock prices, suggesting that managers glean more new information from stock prices to guide their investment decisions as the tick size increases. Consistently, we also find that changes in managerial beliefs, as reflected in adjustments of forecasted capital expenditures, respond more strongly to market feedback under a larger tick size. Additional evidence suggests the following mechanism through which tick size affects managerial learning: a larger tick size reduces algorithmic trading, in turn encouraging fundamental information acquisition. Increased fundamental information acquisition generates incremental information about growth opportunities, macroeconomic factors, and industry factors, with respect to which the market has a comparative information advantage over management.

Keywords: tick size; managerial learning; revelatory price efficiency; investment–q sensitivity; management capex forecast; market feedback

JEL Classification: G14; G31; M40; M41

Suggested Citation

Ye, Mao and Zheng, Miles and Zhu, Wei, The Effect of Tick Size on Managerial Learning from Stock Prices (May 18, 2022). Journal of Accounting & Economics (JAE), Forthcoming, 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 )

1050 Massachusetts Avenue
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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