Tick-Size and Stock Price Crash Risk : Evidence from Sec's Tick Size Pilot Program 2016

Using the Tick-Size Pilot Program, we show that tick-size increases in treated firms cause a significant reduction in stock price crash risk. Earnings management and algorithmic trading are the two key channels of impact. We also show that sophisticated investors such as short-sellers are informed about the reduction of crash risk and reduce their short-selling in treatment firms. We confirm a reversal in crash risk when the tick-size program ends in 2018. These findings provide strong direct causal evidence that changes in the market microstructure design can affect firm-level disclosure and stock crash risk