Tick Size Tolls: Can a Trading Slowdown Improve Earnings News Discovery?
Lee, Charles M. C., Watts, Edward M.
The Accounting Review · 2021 · Volume 96 · Issue 3
Abstract
This study examines how an increase in tick size affects algorithmic trading (AT), fundamental information acquisition (FIA), and the price discovery process around earnings announcements (EAs). Leveraging the SEC's randomized Tick Size Pilot experiment, we show that a tick size increase results in a decline in AT and a sharp drop in absolute cumulative abnormal returns and volume around EAs. More importantly, we find increased FIA in the preannouncement period. Specifically, we show: (1) treatment firms' pre-announcement returns better anticipate next quarter's standardized unexpected earnings; (2) these firms experience an increase in EDGAR web traffic prior to EAs; and (3) they exhibit a drop in price synchronicity with index returns. Taken together, our evidence suggests that while an increase in tick size reduces AT and abnormal market reactionafterEAs, it also increases FIA activitiesprior to EAs. JEL Classifications:M40; M41; G12; G14.
Keywords
earnings announcements, price informativeness, information acquisition, price discovery, market efficiency, Tick Size Pilot, algorithmic trading
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