Price Discreteness and Investment to Price Sensitivity

Posted: 4 Feb 2020

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 2019

Abstract

We find that investment responds more sensitively to a firm’s Tobin’s q when its share price is more discrete. Low-price U.S. stocks exhibit higher investment-q sensitivity, but this pattern disappears in countries whose tick sizes increase with share prices. Using Tick Size Pilot Program as a controlled experiment, we find that an increase in the tick size increases price informativeness and investment-q sensitivity, particularly when firms face tighter tick-size constraints. Investment-q sensitivity increases more when managers’ incentives to learn are stronger, that is, when they have less precise information and when they have more resources to respond to price signals.

Keywords: price discreteness, investment to price sensitivity, price informativeness, managerial learning

JEL Classification: G14, G31

Suggested Citation

Ye, Mao and Zheng, Miles and Zhu, Wei, Price Discreteness and Investment to Price Sensitivity (December 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
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Champaign, IL 61820
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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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