Tick size increase and default risk of small-cap U.S. firms: Evidence from a natural experiment

Adnan Ashraf; Muhammad Saleem; Baolei Qi; Ayesha Shakill

doi:10.1016/j.finmar.2025.101022

Tick size increase and default risk of small-cap U.S. firms: Evidence from a natural experiment

Adnan Ashraf
, Muhammad Saleem
, Baolei Qi
, Ayesha Shakill

School of Management

Research output: Contribution to journal › Article › peer-review

Abstract

Using the 2016 Tick Size Pilot Program (TSP 2016), we find that increased tick size significantly reduces the default probability of small-cap firms, a finding that is robust across alternative measures. TSP 2016 created mixed liquidity effects, namely reduced retail liquidity and improved institutional liquidity, yet both changes lower default risk. Trading slowdowns in reduced algorithmic trading also decrease default probability. Moreover, enhanced pricing efficiency, not the changes in institutional ownership, channels this effect, with short sellers anticipating risk shifts. Our results highlight how market microstructure influences the viability of small-cap firms and inform the development of capital market regulations.

Original language	English
Article number	101022
Journal	Journal of Financial Markets
DOIs	https://doi.org/10.1016/j.finmar.2025.101022
State	Accepted/In press - 2025

Keywords

2016 tick size pilot program
Algorithmic trading
Default probability
Information environment
Liquidity for small versus large orders
Reversal effect

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10.1016/j.finmar.2025.101022

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title = "Tick size increase and default risk of small-cap U.S. firms: Evidence from a natural experiment",

abstract = "Using the 2016 Tick Size Pilot Program (TSP 2016), we find that increased tick size significantly reduces the default probability of small-cap firms, a finding that is robust across alternative measures. TSP 2016 created mixed liquidity effects, namely reduced retail liquidity and improved institutional liquidity, yet both changes lower default risk. Trading slowdowns in reduced algorithmic trading also decrease default probability. Moreover, enhanced pricing efficiency, not the changes in institutional ownership, channels this effect, with short sellers anticipating risk shifts. Our results highlight how market microstructure influences the viability of small-cap firms and inform the development of capital market regulations.",

keywords = "2016 tick size pilot program, Algorithmic trading, Default probability, Information environment, Liquidity for small versus large orders, Reversal effect",

author = "Adnan Ashraf and Muhammad Saleem and Baolei Qi and Ayesha Shakill",

note = "Publisher Copyright: {\textcopyright} 2025 Elsevier B.V.",

year = "2025",

doi = "10.1016/j.finmar.2025.101022",

language = "英语",

journal = "Journal of Financial Markets",

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TY - JOUR

T1 - Tick size increase and default risk of small-cap U.S. firms

T2 - Evidence from a natural experiment

AU - Ashraf, Adnan

AU - Saleem, Muhammad

AU - Qi, Baolei

AU - Shakill, Ayesha

PY - 2025

Y1 - 2025

N2 - Using the 2016 Tick Size Pilot Program (TSP 2016), we find that increased tick size significantly reduces the default probability of small-cap firms, a finding that is robust across alternative measures. TSP 2016 created mixed liquidity effects, namely reduced retail liquidity and improved institutional liquidity, yet both changes lower default risk. Trading slowdowns in reduced algorithmic trading also decrease default probability. Moreover, enhanced pricing efficiency, not the changes in institutional ownership, channels this effect, with short sellers anticipating risk shifts. Our results highlight how market microstructure influences the viability of small-cap firms and inform the development of capital market regulations.

AB - Using the 2016 Tick Size Pilot Program (TSP 2016), we find that increased tick size significantly reduces the default probability of small-cap firms, a finding that is robust across alternative measures. TSP 2016 created mixed liquidity effects, namely reduced retail liquidity and improved institutional liquidity, yet both changes lower default risk. Trading slowdowns in reduced algorithmic trading also decrease default probability. Moreover, enhanced pricing efficiency, not the changes in institutional ownership, channels this effect, with short sellers anticipating risk shifts. Our results highlight how market microstructure influences the viability of small-cap firms and inform the development of capital market regulations.

KW - 2016 tick size pilot program

KW - Algorithmic trading

KW - Default probability

KW - Information environment

KW - Liquidity for small versus large orders

KW - Reversal effect

UR - https://www.scopus.com/pages/publications/105017462389

U2 - 10.1016/j.finmar.2025.101022

DO - 10.1016/j.finmar.2025.101022

M3 - 文章

AN - SCOPUS:105017462389

SN - 1386-4181

JO - Journal of Financial Markets

JF - Journal of Financial Markets

M1 - 101022

ER -

Tick size increase and default risk of small-cap U.S. firms: Evidence from a natural experiment

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Keywords

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