The Nominal Price Puzzle
William Charles Weld
Kenan-Flagler Business School, UNC Chapel Hill
University of California at Los Angeles
Johnson@Cornell Tech, Cornell University; Interdisciplinary Center (IDC)
Richard H. Thaler
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
AFA 2007 Chicago Meetings Paper
Nominal prices of common stocks have remained constant at around $30 per share since the Great Depression as a result of firms splitting their stocks. It is surprising that firms actively maintained constant nominal price for their shares while general prices in the economy went up more than ten fold. This is especially puzzling given that commissions paid by investors on trading ten $30 shares are about ten times those paid on a single $300 share. We estimate, for example, that had share prices of General Electric kept up with inflation, investors in that stock would have saved $100 million in commissions in 2005. We review potential explanations, including signaling and optimal trading range 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 Norms (e.g. Akerlof, 2006) can explain the nominal price puzzle.
Number of Pages in PDF File: 58
Keywords: nominal prices, stock splits, norms
Date posted: March 16, 2006
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