Does stock liquidity improve the relevance of accounting information? Evidence from the SEC tick size pilot program

Utilizing the 2016 SEC tick size pilot program’s robust identification strategy to isolate the liquidity effect, our study reveals a decline in the relevance of accounting information for stock returns in less liquid firms. This trend appears to stem from reduced monitoring by dedicated institutional shareholders following an exogenous liquidity decrease. Our research underscores the necessity for regulators and market participants to consider the broader implications of market microstructure changes on the financial reporting environment of smaller firms. This insight can assist policymakers in better anticipating the indirect consequences when formulating market regulations.