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Stock Price Anchoring

Author

Listed:
  • Mustafa Disli
  • Koen Inghelbrecht
  • Koen Schoors
  • Hannes Stieperaere

Abstract

We provide evidence on a new anomaly in the stock market. We show that stock prices are very robustly correlated to firm value in a cross-sectional framework. We interpret this result as evidence that investors' valuations are biased by a specific version of the availability heuristic, by which investors wrongly interpret the easily available infor- mation about the stock price as a piece of relevant cross-sectional information about true firm value. In this way firm value is \anchored" to the stock price, confirming the existence of anchoring effects in financial markets beyond the boundaries of the experimental lab. Interestingly, firms with a high nominal share price at the end of the year, tend to have lower returns in the subsequent year. After controlling for common risk factors, this underperformance amounts to 1.77 basis points per day, or 4.56% per annum.

Suggested Citation

  • Mustafa Disli & Koen Inghelbrecht & Koen Schoors & Hannes Stieperaere, 2019. "Stock Price Anchoring," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 19/966, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:19/966
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    File URL: http://wps-feb.ugent.be/Papers/wp_19_966.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Anchoring effect; heuristics; anomaly; firm value; stock prices;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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