The Impact of Minimum Trading Units on Stock Value and Price Volatility

We study how minimum trading unit changes on the Tel-Aviv Stock Exchange impact a stock's trading activity, price volatility, and value. The value effects are consistent with Merton's (1987) model, i.e., an increase in the investor base (trading volume) and a decrease in price noisiness affect stock value positively. Our results extend Amihud, Mendelson, and Uno's (1999) tests of Merton by demonstrating a clear relation between price noisiness changes and stock value changes, and by showing that the response to a minimum trading unit decrease becomes less favorable (and arguably even negative) in the thinnest trading stocks.