The Nominal Share Price Puzzle

Author:

Weld William C1,Michaely Roni2,Thaler Richard H3,Benartzi Shlomo4

Affiliation:

1. Finance, Investment and Banking, University of Wisconsin School of Business, Madison, Wisconsin.

2. Johnson Graduate School of Management, Cornell University, Ithaca, New York; Interdisciplinary Center, Herzelia, Israel.

3. University of Chicago Booth School of Business, Chicago, Illinois; National Bureau of Economic Research, Cambridge, Massachusetts.

4. Anderson School of Management, University of California at Los Angeles, Los Angeles, California.

Abstract

The average nominal share prices of common stocks traded on the New York Stock Exchange have remained constant at approximately $35 per share since the Great Depression as a result of stock splits. It is surprising that U.S. firms actively maintained constant nominal prices for their shares while general prices in the economy went up more than tenfold. This is especially puzzling given that commissions paid by investors on trading ten $35 shares are about ten times those paid on a single $350 share. We review potential explanations including signaling and optimal trading ranges 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 customs and norms can explain the nominal price puzzle.

Publisher

American Economic Association

Subject

Economics and Econometrics,Economics and Econometrics

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