Does Algorithmic Trading Affect Corporate Innovation: Evidence From the Tick Size Pilot

Abstract

Does the stock price efficiency, i.e. the speed and the extent with which prices reflect public information, affect corporate innovation? Using the intensity of algorithmic trading (AT) to capture price efficiency and the Tick Size Pilot experiment setting, we establish a causal positive relation between AT and innovation measured by patents. The relation is stronger for firms where managerial compensation is more closely linked to the share price performance and for more opaque firms where managerial effort is more difficult to observe from financial information. Our results generalize to other measures of innovation such as R&D spending and the number of citations.