What do stock price levels tell us about the firms?

49 Pages Posted: 16 Mar 2012 Last revised: 3 Aug 2017

See all articles by Konan Chan

Konan Chan

National Chengchi Unversity (NCCU) - Finance

Fengfei Li

Deakin University - Faculty of Business and Law

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Ji-Chai Lin

Hong Kong PolyU

Date Written: June 17, 2017

Abstract

We hypothesize that high stock price levels impede informed trading on the stocks and reduce price informativeness. This is because uninformed trading is needed to facilitate informed trading, and high stock prices may impose budget constraints on uninformed investors. Indeed, we find, for high-price firms, (i) options to stock trading volume (O/S), an informed trading measure in options market, is higher, (ii) price informativeness about future earnings is lower, and (iii) investment sensitivity to price is lower. We also find these patterns reverse after stock splits, suggesting that firms can use splits to improve informed trading and enhance price informativeness.

Keywords: Stock price level, price informativeness, O/S, future earnings, stock splits

JEL Classification: G30, G12, G14, G17

Suggested Citation

Chan, Konan and Li, Fengfei and Lin, Tse-Chun and Lin, Ji-Chai, What do stock price levels tell us about the firms? (June 17, 2017). Journal of Corporate Finance, Vol. 46, 2017. Available at SSRN: https://ssrn.com/abstract=2022870 or http://dx.doi.org/10.2139/ssrn.2022870

Konan Chan

National Chengchi Unversity (NCCU) - Finance ( email )

No. 64, Chih-Nan Road
Section 2
Taipei, 11623
Taiwan
+886-2-29393091 ext 81239 (Phone)

Fengfei Li

Deakin University - Faculty of Business and Law ( email )

Burwood, Victoria 3215
Australia

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Ji-Chai Lin (Contact Author)

Hong Kong PolyU ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

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