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The Impact of Minimum Trading Units on Stock Value and Price Volatility

Published online by Cambridge University Press:  06 April 2009

Shmuel Hauser
Affiliation:
shauser@bgumail.bgu.ac.il, School of Management, Ben-Gurion University of the Negev, PO Box 653, Beer-Sheva 84105, Israel, and School of Business, Rutgers University, 227 Penn St., Camden, NJ 08102;
Beni Lauterbach
Affiliation:
lauteb@mail.biu.ac.il, School of Business Administration, Bar-Ilan University, Ramat Gan 52900, Israel.

Abstract

We study how minimum trading unit changes on the Tel-Aviv Stock Exchange impact a stock's trading activity, price volatility, and value. The value effects are consistent with Merton's (1987) model, i.e., an increase in the investor base (trading volume) and a decrease in price noisiness affect stock value positively. Our results extend Amihud, Mendelson, and Uno's (1999) tests of Merton by demonstrating a clear relation between price noisiness changes and stock value changes, and by showing that the response to a minimum trading unit decrease becomes less favorable (and arguably even negative) in the thinnest trading stocks.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 2003

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