Free Content The Nominal Share Price Puzzle

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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.

Document Type: Research Article

DOI: http://dx.doi.org/10.1257/089533009788430625

Publication date: March 1, 2009

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  • The Journal of Economic Perspectives (JEP) attempts to fill a gap between the general interest press and most other academic economics journals. The journal aims to publish articles that will serve several goals: to synthesize and integrate lessons learned from active lines of economic research; to provide economic analysis of public policy issues; to encourage cross-fertilization of ideas among the fields of thinking; to offer readers an accessible source for state-of-the-art economic thinking; to suggest directions for future research; to provide insights and readings for classroom use; and to address issues relating to the economics profession.
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