Penny Wise, Dollar Foolish: Buy-Sell Imbalances On and Around Round Numbers
We document consistent return patterns related to round numbers. We examine returns following previous day closing prices that are just above or below round number benchmarks. We find, for one-digit, two-digit and three-digit levels, that returns following closing prices just above a round number benchmark are significantly higher than returns following prices just below. For example, returns following “9-ending” prices, which are just below round numbers, such as $25.49, are significantly lower than returns following “1-ending” prices, such as $25.51, which are just above. Our results hold when controlling for bid/ask bounce, and are robust for a wide collection of subsamples based on year, firm size, trading volume, exchange and institutional ownership. While the magnitude of return difference varies depending on the type of round number or the subsample, the magnitude generally amounts to between 5 and 20 basis points per day (roughly 15% to 75% annualized). We explore alternate explanations for the pattern. * We would like to thank Terrance Odean and seminar participants at Rice University, the University of Vienna, the Third Annual Early Career Women in Finance Mini-Conference, and State Street Global Advisors for helpful discussions and feedback.