The real effects of tick-size adjustments: Evidence from the 2016 tick-size pilot

Abstract

We examine the real effects of the SEC's 2016 Tick Size Pilot on firms' M&A activities. Following the exogenous shock to stock liquidity, treated firms significantly reduce M&A intensity. The reduction is more pronounced for treated firms with a lower level of information asymmetry and higher valuation before the pilot or for firms experiencing a larger drop in price around the pilot. Affected firms also reduce stock payments, avoid large or public-target deals, but exhibit higher deal completion rates. The drop in M&A deals is concentrated in horizontal and diversifying mergers, which are more likely to destroy value. Treated firms generate greater higher deal announcement returns. M&A activities reverse partially after the completion of the pilot. Overall, our findings are consistent with the information asymmetry and valuation hypothesis and suggest that negative liquidity shocks can discipline corporate acquisition decisions by curbing lower-quality deals and promoting more cautious deal structuring.