6-2 (A11)

Stock Price Levels and Price Informativeness

 

Konan Chan

National Chengchi University, Taiwan

Fengfei Li

University of Hong Kong, Hong Kong

Tse-Chun Lin

University of Hong Kong, Hong Kong

Ji-Chai Lin

Louisiana State University, USA

 

This paper posits that high stock price levels impede informed trading on the stocks, reduce price informativeness, and make listed options more appealing to the informed because uninformed trading is needed for market making and high stock prices may impose budget constraints on uninformed investors and limit their risk sharing capacity. Indeed, we find that stock price informativeness about future earnings is inversely related to stock price levels, and that Roll et al.’s (2010) O/S, the relative trading of options over stock, increases with stock price levels. We further use a split sample and find evidence consistent with our second hypothesis that firms can use stock splits to lower stock price levels, improve informed trading on their stocks, and enhance price informativeness. Thus, our study suggests that stock price levels matter in price informativeness and in where informed traders choose to trade.