Nominal Price Level and Noise Trading

Contributing to the debate on the nominal price puzzle, we show that higher stock price level is associated with lower noise trading level which confirms Black's (1986) conjectures that noise traders prefer low-priced stocks to high-priced stocks. The result is robust after controlling for institutional ownership, analyst coverage and company size. Given that noise trading level affects liquidity and cost of capital, this finding demonstrates the economic relevance of price level decision