Price Discreteness and Investment to Price Sensitivity
Posted: 4 Feb 2020
Date Written: December 2019
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: Suggested Citation