Tick Size and Earnings Guidance in Small-Cap Firms: Evidence from the SEC’s Tick Size Pilot Program

Yangyang Chen (), Jeffrey Ng (), Emmanuel Ofosu () and Xin Yang ()
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Yangyang Chen: City University of Hong Kong, Kowloon, Hong Kong, China
Jeffrey Ng: The University of Hong Kong, Pok Fu Lam, Hong Kong, China
Emmanuel Ofosu: City University of Hong Kong, Kowloon, Hong Kong, China
Xin Yang: Central University of Finance and Economics, Beijing 102206, China

Management Science, 2024, vol. 70, issue 8, 5386-5407

Abstract: The Securities and Exchange Commission’s 2016 Tick Size Pilot Program was a natural experiment that imposed increases in tick size for randomly selected small-cap firms. Using a difference-in-differences research design, we examine the effect of this increase in tick size on earnings guidance. We find that after initiation of the program, treatment firms provide significantly less earnings guidance. We provide further evidence that this decrease is driven by increases in investors’ fundamental information acquisition and in firms’ financial reporting quality, consistent with firms reducing earnings guidance when investors are already more informed. The decrease is stronger for firms with higher proprietary costs of disclosure, consistent with firms being more likely to reduce costly disclosure when investors are more informed. In contrast, the decrease is weaker for firms with greater external financing needs, consistent with these firms continuing to seek the benefits of disclosure, even when investors are more informed. Taken together, our results suggest that an increase in tick size makes investors more informed, which, in turn, reduces the need for firms to provide earnings guidance, though the extent of the reduction depends on the costs and benefits of providing earnings guidance.

Keywords: Tick Size Pilot Program; investor information acquisition; earnings guidance (search for similar items in EconPapers)
Date: 2024
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