Minimum Tick Size and Analyst Coverage: Evidence from the Tick Size Pilot Program

Abstract

We examine whether an exogenous increase in the minimum tick size created by the natural experiment, the Tick Size Pilot Program, impacts analyst coverage. Proponents of the Tick Size Pilot Program argue that increasing the minimum tick size would increase analysts’ incentives to cover these firms (the promotion effect). In contrast, indirect evidence from prior research suggests that increasing the tick size might lead to decreased analyst coverage due to lower trading volume (the liquidity effect). Surprisingly, evidence on whether changes in tick size impact analyst coverage is absent from the literature. Using a difference-in-differences research design, we find that analyst coverage declined for tick-constrained NYSE/AMEX stocks that experienced the strictest increase in minimum tick size trading rules. We find no change in analyst coverage for NASDAQ stocks, relative to the control sample. This finding is robust to several cross-sectional tests and even within samples where we expect the promotion effect is strong. Overall, our results indicate that the regulatory activism surrounding the increase in the minimum tick size is likely misplaced, as we find no evidence to support the claims that increasing the minimum tick size increases analyst coverage for small cap stocks.