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This study examines whether changes in investors¡¯ information processing activities affect firms¡¯ cost behavior using the Tick Size Pilot Program (TSPP) as a natural experiment. Prior studies document that the implementation of TSPP causes an exogenous increase in the minimum tick size for small-cap firms, leading to a sudden shift in investor behavior from short-term algorithmic trading to fundamental trading. Consistent with this shift in investors¡¯ information processing behavior, we find a post-TSPP increase in SG&A cost stickiness in these treatment firms, suggesting that managers are more likely to pursue future benefits created by SG&A spending when investors are motivated to acquire fundamental information. This effect is stronger for firms with more algorithmic trading and growth opportunities in the pre-TSPP period. We also find that the market reaction to cost stickiness is stronger after the initiation of TSPP, suggesting that investors can better understand the sticky cost information after TSPP. Finally, we document that treatment firms increasing cost stickiness after TSPP achieve better future performance, indicating that the post-TSPP increase in cost stickiness is indeed value-enhancing. Our study suggests that small firms may benefit from a market with more fundamental traders as managers are provided with more opportunities to realize the future value of resource commitment.

zcarol2@ceibs.edu