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

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  • Albuquerque, Rui
  • Song, Shiyun
  • Yao, Chen

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.

Suggested Citation

  • Albuquerque, Rui & Song, Shiyun & Yao, Chen, 2020. "The price effects of liquidity shocks: A study of the SEC’s tick size experiment," Journal of Financial Economics, Elsevier, vol. 138(3), pages 700-724.
  • Handle: RePEc:eee:jfinec:v:138:y:2020:i:3:p:700-724
    DOI: 10.1016/j.jfineco.2020.07.002
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    More about this item

    Keywords

    Tick size pilot; Liquidity; Information risk; Price efficiency; News response; Investor horizon; Liquidity risk; Liquidity premium; Cost of capital; JOBS Act; SEC;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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