The Share Price Puzzle
We document substantial variation in the prices of common stocks in U.S. markets due to firms selecting particular price ranges for their shares. Cross-sectional evidence indicates that variables consistent with Merton's model of capital market equilibrium explain roughly two-thirds of this variation in share prices. In addition, measures of trading range and share price appreciation predict stock splits, and the "investor base" of firms that split their stock increases compared to other firms. We conclude that firms manage share price levels to increase the value of the firm.
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