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The Nominal Share Price Puzzle

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Author Info

  • William C. Weld
  • Roni Michaely
  • Richard H. Thaler
  • Shlomo Benartzi

Abstract

The average nominal share prices of common stocks traded on the New York Stock Exchange have remained constant at approximately $35 per share since the Great Depression as a result of stock splits. It is surprising that U.S. firms actively maintained constant nominal prices for their shares while general prices in the economy went up more than tenfold. This is especially puzzling given that commissions paid by investors on trading ten $35 shares are about ten times those paid on a single $350 share. We review potential explanations including signaling and optimal trading ranges and find that none of the existing theories are able to explain the observed constant nominal prices. We suggest that the evidence is consistent with the idea that customs and norms can explain the nominal price puzzle.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.2.121
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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 23 (2009)
Issue (Month): 2 (Spring)
Pages: 121-42

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Handle: RePEc:aea:jecper:v:23:y:2009:i:2:p:121-42

Note: DOI: 10.1257/jep.23.2.121
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  1. Grinblatt, Mark S. & Masulis, Ronald W. & Titman, Sheridan, 1984. "The valuation effects of stock splits and stock dividends," Journal of Financial Economics, Elsevier, vol. 13(4), pages 461-490, December.
  2. Ikenberry, David L. & Rankine, Graeme & Stice, Earl K., 1996. "What Do Stock Splits Really Signal?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 357-375, September.
  3. David L. Ikenberry & Sundaresh Ramnath, 2002. "Underreaction to Self-Selected News Events: The Case of Stock Splits," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 489-526, March.
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  7. H. Peyton Young, 2007. "Social Norms," Economics Series Working Papers 307, University of Oxford, Department of Economics.
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  9. Malcolm Baker & Robin Greenwood & Jeffrey Wurgler, 2008. "Catering Through Nominal Share Prices," NBER Working Papers 13762, National Bureau of Economic Research, Inc.
  10. Easley, David & O'Hara, Maureen & Saar, Gideon, 2001. "How Stock Splits Affect Trading: A Microstructure Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 25-51, March.
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  14. Fernando, Chitru S. & Krishnamurthy, Srinivasan & Spindt, Paul A., 2004. "Are share price levels informative? Evidence from the ownership, pricing, turnover and performance of IPO firms," Journal of Financial Markets, Elsevier, vol. 7(4), pages 377-403, October.
  15. Copeland, Thomas E, 1979. "Liquidity Changes Following Stock Splits," Journal of Finance, American Finance Association, vol. 34(1), pages 115-41, March.
  16. Desai, Hemang & Jain, Prem C, 1997. "Long-Run Common Stock Returns following Stock Splits and Reverse Splits," The Journal of Business, University of Chicago Press, vol. 70(3), pages 409-33, July.
  17. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
  18. McNichols, Maureen & Dravid, Ajay, 1990. " Stock Dividends, Stock Splits, and Signaling," Journal of Finance, American Finance Association, vol. 45(3), pages 857-79, July.
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Cited by:
  1. Fernando, Chitru S. & Gatchev, Vladimir A. & Spindt, Paul A., 2012. "Institutional ownership, analyst following, and share prices," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2175-2189.
  2. Adam Zaremba & Rados³aw ¯mudziñski, 2014. "The Low Price Effect On The Polish Market," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 10(1), pages 69-85, June.

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