What Do Stock Price Levels Tell Us about the Firms?

What Do Stock Price Levels Tell Us about the Firms?

Konan Chan National Chengchi University (NCCU)

Fengfei Li University of Hong Kong

Tse-Chun Lin University of Hong Kong – Faculty of Business and Economics

Ji-Chai Lin Louisiana State University, Baton Rouge – E.J. Ourso College of Business Administration

February 26, 2013

What do stock price levels tell us about the firms? Based on market microstructure theories, this paper hypothesizes that, ceteris paribus, high stock price levels impede informed trading on the stocks and reduce price informativeness because uninformed trading is needed to facilitate informed trading, and high stock prices may impose budget constraints on uninformed investors and limit their risk sharing capacity. This hypothesis suggests that since their stock prices are less informative, higher-price stocks’ listed options are more appealing to informed traders. Indeed, controlling for firm size, analyst coverage, and other determinants, we find that stock price informativeness about future earnings is lower and Roll et al.’s (2010) O/S, the relative trading of options over stock, is higher for firms with higher stock price levels. We also find that higher-price firms have lower investment sensitivity to stock price. For robustness checks, we further use a split sample as an event study and find evidence consistent with our hypothesis that firms can use stock splits to improve informed trading on their stocks and enhance price informativeness. Our findings imply that stock price levels matter in price informativeness and in where traders choose to trade. Furthermore, when firms need less feedback from the market, they tend to keep their stock prices at higher levels.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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