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What do stock price levels tell us about the firms?

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  • Chan, Konan
  • Li, Fengfei
  • Lin, Ji-Chai
  • Lin, Tse-Chun

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.

Suggested Citation

  • Chan, Konan & Li, Fengfei & Lin, Ji-Chai & Lin, Tse-Chun, 2017. "What do stock price levels tell us about the firms?," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 34-50.
    • Handle: RePEc:eee:corfin:v:46:y:2017:i:c:p:34-50
    DOI: 10.1016/j.jcorpfin.2017.06.013
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    More about this item

    Keywords

    Stock price level; Price informativeness; O/S; Future earnings; Stock splits;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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