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 language | English |
|---|---|
| Pages (from-to) | 34-50 |
| Number of pages | 17 |
| Journal | Journal of Corporate Finance |
| Volume | 46 |
| DOIs | |
| Publication status | Published - 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