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Catering through Nominal Share Prices

Author

Listed:
  • MALCOLM BAKER
  • ROBIN GREENWOOD
  • JEFFREY WURGLER

Abstract

We propose and test a catering theory of nominal stock prices. The theory predicts that when investors place higher valuations on low‐price firms, managers respond by supplying shares at lower price levels, and vice versa. We confirm these predictions in time‐series and firm‐level data using several measures of time‐varying catering incentives. More generally, the results provide unusually clean evidence that catering influences corporate decisions, because the process of targeting nominal share prices is not well explained by alternative theories.

Suggested Citation

  • Malcolm Baker & Robin Greenwood & Jeffrey Wurgler, 2009. "Catering through Nominal Share Prices," Journal of Finance, American Finance Association, vol. 64(6), pages 2559-2590, December.
    • Handle: RePEc:bla:jfinan:v:64:y:2009:i:6:p:2559-2590
    DOI: 10.1111/j.1540-6261.2009.01511.x
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G3 - Financial Economics - - Corporate Finance and Governance

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