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The Nominal Price Puzzle

58 Pages Posted: 16 Mar 2006  

William Charles Weld

Kenan-Flagler Business School, UNC Chapel Hill

Shlomo Benartzi

University of California at Los Angeles

Roni Michaely

Johnson@Cornell Tech, Cornell University

Richard H. Thaler

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: March 2007

Abstract

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.

Keywords: nominal prices, stock splits, norms

Suggested Citation

Weld, William Charles and Benartzi, Shlomo and Michaely, Roni and Thaler, Richard H., The Nominal Price Puzzle (March 2007). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891213 or http://dx.doi.org/10.2139/ssrn.891213

William Charles Weld (Contact Author)

Kenan-Flagler Business School, UNC Chapel Hill ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
9199626889 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/finance/William-Weld

Shlomo Benartzi

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-206-9939 (Phone)
310-267-2193 (Fax)

Roni Michaely

Johnson@Cornell Tech, Cornell University ( email )

111 8th Avenue #302
New York, NY 10011
United States

Richard H. Thaler

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-5208 (Phone)
773-702-0458 (Fax)

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