Investor Preferences, Stock Prices, and Returns

47 Pages Posted: 18 Feb 2015 Last revised: 20 Feb 2020

Date Written: February 18, 2020


Motivated by investor preference for low price stocks, we examine the significance of nominal prices for the universe of U.S. stocks. We find that there is no statistically significant difference in returns for stocks with different nominal prices when size is not controlled for. However, a control for size is needed to remove its confounding effect (Berk, 1995) on price and returns because size and price are positively related (correlation of 0.70). When we orthogonalize nominal price with size, we find that stock prices do matter in predicting future returns. In particular, high price stocks outperform low price stocks by a 5-factor alpha of 0.43% per month (or 5.28% annually). We note that behavioral patterns of individual investors are consistent with these return patterns: the return difference is higher for stocks with (i) high past returns, (ii) high individual investor preference, (iii) higher investor sentiment, and (iv) low institutional ownership. These results are also evident in a longitudinal setting, following earnings announcements.

Keywords: investor behavior; nominal prices; market capitalization; idiosyncratic volatility; institutional ownership; sentiment

JEL Classification: G11, G14

Suggested Citation

Singal, Vijay and Tayal, Jitendra, Investor Preferences, Stock Prices, and Returns (February 18, 2020). Available at SSRN: or

Vijay Singal (Contact Author)

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States
5402317750 (Phone)

Jitendra Tayal

Ohio University ( email )

Athens, OH 45701
United States

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