Amazing fact # 743: Nominal share prices

Nominal and Real Share Prices

To the right are a couple of graphs of nominal share prices on the American stock market.

What is odd about them?  The fact that there is such a strong nominal anchor for share prices.  Though the price of goods and services tends to keep going up reflecting inflation or down reflecting productivity growth, shares just get ‘split’ into more shares to keep their nominal value stable and their real value falling.

I guess it makes sense that share prices don’t fall to tiny amounts like 0.1 cents or rise to huge amounts, like $10,000, but i’t’s pretty weird that there is such stability through time.

Weirder still, there should be no expectation that small companies have low share prices and large companies have higher prices (since the difference in capital value could be taken up as more shares at the same price). But there’s a strong and stable relationship, as you can see from the chart below.  Bug companies have high share prices and smaller ones have smaller ones.

These graphs are behind a paywall here in William C. Weld, Roni Michaely, Richard H. Thaler, and Shlomo Benartzi, “The Nominal Share Price Puzzle”, Journal of Economic PerspectivesVolume 23, Number 2Spring 2009Pages 121142

Share prices and company size

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SJ
SJ
12 years ago

The low end is no mystery. If your share price falls below US$1, you get de-listed.

At the other end, Berkshire Hathaway (Warren Buffet’s firm) has never had a split. It trades at around US$100k, and consequently is highly illiquid.

SJ
SJ
12 years ago

I guess that’s probably the answer to the market cap vs share price correlation. They’re operating to some antiquated liquidity rule.

SJ
SJ
12 years ago

With a bit more (superficial) searching around, it appears that there’s a rule-of-thumb that says that if your share price exceeds US$100 and you think it’s heading higher, you split.

For example, see here:

Moreover, there is another factor that engenders the announcement of a stock split. Companies tend to try to keep their stock within a certain price range. Therefore, when a stock hits the company’s price target, the company, upon approval of the Board of Directors and the shareholders, will announce a stock split. From the research we have compiled on our five companies, these price ranges seem to vary between companies, but most companies do seem to cap their price range somewhere in the mid-100’s. INTC, MSFT, and EMC have each split their stock when the share price reached ranges between approximately $130-160 per share; whereas, SUNW and ORCL announced splits at levels between $85-100 per share. Apparently, every company has their own idea of what price and when is most desirable to split their stock, but there does seem to be some degree of a psychological range where many companies seem to wait until, at least, their stock reaches $100/share.

Patrick
Patrick(@patrick)
12 years ago

I have worked with a couple of Australian firms who have split their shares. There does seem to be very strong if possibly unsubstianted belief that smaller investors won’t buy ‘expensive’ shares, and that this can hurt a company’s share price.

Also a smaller share priceis claimed to make it (slightly) easier to manage employee share programs, where the number of shares involved might not be very many in some cases.