Tick Size and Financial Reporting Quality in Small-Cap Firms: Evidence from a Natural Experiment

55 Pages Posted: 27 Jul 2020

See all articles by Anwer S. Ahmed

Anwer S. Ahmed

Texas A&M University - Mays Business School

Yiwen Li

Texas A&M University - Department of Accounting

Nina Xu

University of Connecticut

Multiple version iconThere are 2 versions of this paper

Date Written: June 2020

Abstract

Using a natural experiment (the SEC’s 2016 Tick Size Pilot Program), we investigate the effects of an increase in tick size on financial reporting quality. The tick size pilot program reduces algorithmic trading and increases fundamental investors’ information acquisition and trading activities. This in turn increases the scrutiny of managers’ financial reporting choices and reduces their incentives to engage in misreporting. Using a difference-in-differences research design, we find a significant decrease in the magnitude of discretionary accruals, a significant reduction in the likelihood of just meeting or beating analysts’ forecasts, and a marginally significant decrease in restatements for the treated firms in the pilot program. Furthermore, we find that the change in financial reporting quality is concentrated in treated firms experiencing decreases in algorithmic trading and increases in information acquisition activities. We also find that the mispricing of accruals is significantly lower for treated firms. Taken together, our results suggest that an increase in tick size has a causal effect on firms’ financial reporting quality.

Keywords: Tick size pilot program; Financial reporting quality; Information acquisition

JEL Classification: M40; M41; G12; G14

Suggested Citation

Ahmed, Anwer S. and Li, Yiwen and Xu, Nina, Tick Size and Financial Reporting Quality in Small-Cap Firms: Evidence from a Natural Experiment (June 2020). Available at SSRN: https://ssrn.com/abstract=3640681 or http://dx.doi.org/10.2139/ssrn.3640681

Anwer S. Ahmed (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Yiwen Li

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
5859675130 (Phone)

Nina Xu

University of Connecticut ( email )

Storrs, CT 06269-1063
United States

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