The price effects of liquidity shocks: A study of the SEC’s tick size experiment

Rui Albuquerque, Shiyun Song and Chen Yao

Journal of Financial Economics, 2020, vol. 138, issue 3, 700-724

Abstract: Do stock prices of publicly listed companies respond to changes in transaction costs? Using the SEC’s pilot program that increased the tick size for approximately 1,200 randomly chosen stocks, we find a stock price decrease between 1.75% and 3.2% for small spread stocks affected by the larger tick size relative to a control group. We find that the increase in the present value of transaction costs accounts for a small percentage of the price decrease. We study channels of price variation due to changes in expected returns: information risk, investor horizon, and liquidity risk. The evidence suggests that trading frictions affect the cost of capital.

Keywords: Tick size pilot; Liquidity; Information risk; Price efficiency; News response; Investor horizon; Liquidity risk; Liquidity premium; Cost of capital; JOBS Act; SEC (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:138:y:2020:i:3:p:700-724

DOI: 10.1016/j.jfineco.2020.07.002

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