Cross-Sectional Analysis of Asymmetric Information after Decimalization

Journal of Business and Economic Perspectives, No, 2, Spring 2005

31 Pages Posted: 31 May 2005

See all articles by Mingsheng Li

Mingsheng Li

Bowling Green State University - College of Business Administration

Michael E. Parker

University of Louisiana at Monroe

Abstract

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

Li, Mingsheng and Parker, Michael E., Cross-Sectional Analysis of Asymmetric Information after Decimalization. Journal of Business and Economic Perspectives, No, 2, Spring 2005. Available at SSRN: https://ssrn.com/abstract=731384

Mingsheng Li (Contact Author)

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Michael E. Parker

University of Louisiana at Monroe ( email )

700 University Avenue
Monroe, LA 71209
United States

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