Stock Liquidity and Cost Behavior : Evidence from the Tick Size Pilot Program

This study explores how stock liquidity shapes a firm’s cost behavior using the Tick Size Pilot Program (TSPP) as a natural experiment. We find that an exogeneous increase in the minimum tick size for small cap stocks leads to an increase in SG&A cost stickiness in these pilot firms, suggesting that managers can learn from the decrease in stock liquidity and respond by retaining slack resources for future growth. This effect is stronger for firms that are: 1) owned by more transient institutional investors, 2) traded by more algorithmic traders, 3) managed by future-oriented executives, and 4) exhibiting high growth opportunities. These results are robust to conducting a parallel trend analysis and several placebo tests and measuring cost stickiness using quarterly data and total operating costs. Furthermore, pilot firms that increase the level of cost stickiness during the TSPP period tend to achieve better future performance. Overall, our study suggests that small firms may benefit from a less liquid stock market with more fundamental traders as managers respond to lower stock liquidity by retaining committed resources for future growth