The Effect of Tick Size on Managerial Learning from Stock Prices

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