2006 Headlines
The Hundred Million Dollar Question: The Nominal Price Puzzle
November 30, 2006 | Ithaca, NY - Firms have actively kept the nominal prices of common stocks constant at around $30 to $40 per share since the Great Depression by splitting their stocks. A new research paper entitled "The Nominal Price Puzzle," written by Roni Michaely, professor of finance at the Johnson School at Cornell University and his co-authors, Johnson School PhD candidate William C. Weld, Shlomo Benartzi at UCLA, and Richard H. Thaler at the University of Chicago, explores why firms proactively keep their nominal share prices at this level while general prices in the economy have increased more than ten fold over the same time. Given that a significant portion of trading costs are per share, one would expect that at a minimum, shares prices would keep up with inflation and should not stay constant in nominal dollars.
One example from the report shows that General Electric (GE) was trading at $38.25 a share on December 31, 1935 and at $35.05 a share on December 31, 2005. Had share prices of General Electric kept up with inflation, the authors estimate that investors in that stock would have saved $100 million last year in commissions.
According to Professor Michaely, "None of the rational explanations work. We have to then look outside the realm of rational economic reasoning and come back to societal norms. Average investors seem comfortable with the $30 to $40 price per share. Norms are sometimes expensive, and this one costs investors and companies. There are some companies that buck this trend. One share of Berkshire Hathaway costs upwards of $100,000, and Google founders have recently remarked that they won't split their stock despite the $500 plus price tag. What do these two companies have in common? They don't pay attention to norms."
If you would like to speak to Roni Michaely about the nominal price puzzle, please contact:
Deirdre Snyder
Public Relations Officer
The Johnson School at Cornell University
Email: dgs37@cornell.edu
Phone: 607.255.3494
Cell: 607.592.2188
