Nominal Prices Matter

Abstract

Based on traditional finance theory, nominal stock prices should be inconsequential. However, the effect of nominal prices is not illusory once the price is not confounded with size. In this paper, we find that, controlled for size, high price stocks significantly outperform low price stocks by an abnormal 4.32% per year. Furthermore, high price stocks are less sensitive to market movements, display lower idiosyncratic volatility, lower idiosyncratic skewness, and lower illiquidity. Using a unique dataset, we observe that the number of individual shareholders is higher for low price stocks than for high price stocks in the same size decile, while institutional ownership is greater for high price stocks. The return differential between high and low price stocks is robust to various specifications and tests, controlling for idiosyncratic volatility, and using price cut-offs of $1 and $5. In addition to cross-sectional analyses, similar results are obtained in a longitudinal setting following stock splits. The difference in returns is partially explained by idiosyncratic volatility though the price effect continues to remain important.