What do stock price levels tell us about the firms?

Konan Chan, Fengfei Li, Ji-chai Lin, Tse Chun Lin

Research output: Journal article publicationJournal articleAcademic researchpeer-review

4 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)34-50
Number of pages17
JournalJournal of Corporate Finance
Volume46
DOIs
Publication statusPublished - 1 Oct 2017

Keywords

  • Future earnings
  • O/S
  • Price informativeness
  • Stock price level
  • Stock splits

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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