Stock Price Level and Price Response

David Gal, Northwestern University
This paper proposes that stocks with nominally cheap share prices will be more sensitive to information and events than stocks with nominally expensive share prices. This paper posits a two-part account of this proposed phenomenon: first, people use the nominal price of a share as a proxy for the share’s value; and second, people’s sense of the magnitude of price differences is sensitive to absolute—not just relative—differences in prices. The proposed account is supported by evidence from both experiments and thirty years of stock market data. Implications for asset pricing and consumer behavior are discussed.
[ to cite ]:
David Gal (2008) ,"Stock Price Level and Price Response", in NA - Advances in Consumer Research Volume 35, eds. Angela Y. Lee and Dilip Soman, Duluth, MN : Association for Consumer Research, Pages: 198-200.