Liquidity and market efficiency: Analysis of NASDAQ firms

We analyze all NASDAQ firms with respect to their short-horizon return predictability, which Chordia et al. (2008) formulate as an inverse indicator of market efficiency. Our results confirm that increased liquidity enhances market efficiency, and show that this effect is amplified during periods with new information. After controlling for liquidity and information effects, we find that NASDAQ firms experience an improvement in market efficiency only from the sixteenth to the decimal tick size regimes. We further demonstrate that inferences of market efficiency are not uniform across the different portfolios formed on the basis of trading frequency, volume and market capitalization.