Do Nominal Prices Affect Retail Investors’ Selling Decisions?
44 Pages Posted: 21 Nov 2022 Last revised: 13 Oct 2023
Date Written: November 7, 2022
Abstract
In this study, I examine the selling behavior of retail investors. I find that retail investors are more likely to sell stocks with high prices than to sell stocks with low prices. In particular, I find that a 1% increase in price is associated with a 0.2-0.3% increase in an asset’s probability of being sold and that a doubling in share price leads to an increase of up to 20% in an asset’s probability of being sold. My finding that retail investors’ selling decisions are affected by nominal prices is distinct from the existence of a disposition effect. To establish a causal relation, I use stock splits as exogenous shocks to the nominal share price level. I find that the probability of observing a sale decreases by 37% after a stock split has taken place. My findings are in line with a liquidity-based story, i.e. retail investors tend to sell stocks with high prices in order to minimize transaction costs when they are in need of liquidity.
Keywords: Investor Behavior, Nominal Price, Stock Splits
JEL Classification: G11, G40
Suggested Citation: Suggested Citation