Cross-Sectional Analysis of Asymmetric Information after Decimalization
Journal of Business and Economic Perspectives, No, 2, Spring 2005
31 Pages Posted: 31 May 2005
Many studies find that tick size reduction results in smaller spreads and lower market making profits. However, how decimalization affects adverse selection cost and information efficiency and how the effects differ across exchanges and across stocks have not been fully investigated. This study shows that after decimalization, the adverse selection cost is significantly smaller and inversely related to firm size and trading volume. This suggests an improvement on information efficiency in general; however, the improvement is smaller for small firms and for less actively traded stocks. Decimalization reduces the difference in adverse cost between exchanges, but the adverse cost is still larger for the NYSE stocks than for the Nasdaq stocks.
Keywords: Asymmetric information, Adverse selection cost, decimalization, Market information efficiency
JEL Classification: G14
Suggested Citation: Suggested Citation