School of Business, Georgetown University. I thank Corinne Bronfman, Sharon Brown, Sara Burke, Allan Eberhart, Bob Fisher, Larry Harris, Pete Locke, Cynthia McDonald, Colin Moriarty, Jay Ritter, Pietra Rivoli, Maurice Samuels, Barry Schachter, Jim Shapiro, Dorothy Silvers, Peter Swan, Nicolo Torre, Stephen Wheeler, Richard Wilson, and Scott Winslow, as well as seminar participants at the Commodity Futures Trading Commission and Georgetown University for helpful information and comments. In addition, I thank the editor, René Stulz, and an anonymous referee for extremely helpful comments. I am grateful for financial support from Georgetown University and research support from the Georgetown University Center for Business-Government Relations. All errors remain mine.
Tick Size, Share Prices, and Stock Splits
Article first published online: 18 APR 2012
1997 The American Finance Association
The Journal of Finance
Volume 52, Issue 2, pages 655–681, June 1997
How to Cite
ANGEL, J. J. (1997), Tick Size, Share Prices, and Stock Splits. The Journal of Finance, 52: 655–681. doi: 10.1111/j.1540-6261.1997.tb04817.x
- Issue published online: 18 APR 2012
- Article first published online: 18 APR 2012
Minimum price variation rules help explain why stock prices vary substantially across countries, and other curiosities of share prices. Companies tend to split their stock so that the institutionally mandated minimum tick size is optimal relative to the stock price. A large relative tick size provides an incentive for dealers to make markets and for investors to provide liquidity by placing limit orders, despite its placing a high floor on the quoted bid-ask spread. A simple model suggests that idiosyncratic risk, firm size, and visibility of the firm affect the optimal relative tick size and thus the share price.