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Catering Through Nominal Share Prices

Author

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  • 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 will maintain share prices at lower levels, and vice-versa. Using measures of time-varying catering incentives based on valuation ratios, split announcement effects, and future returns, we find empirical support for the predictions in both time-series and firm-level data. Given the strong cross-sectional relationship between capitalization and nominal share price, an interpretation of the results is that managers may be trying to categorize their firms as small firms when investors favor small firms.

Suggested Citation

  • Malcolm Baker & Robin Greenwood & Jeffrey Wurgler, 2008. "Catering Through Nominal Share Prices," NBER Working Papers 13762, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13762
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    References listed on IDEAS

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    Cited by:

    1. Claire Célérier & Boris Vallée, 2016. "Catering to investors through product complexity," ESRB Working Paper Series 14, European Systemic Risk Board.
    2. repec:eee:jimfin:v:74:y:2017:i:c:p:69-87 is not listed on IDEAS
    3. Kaustia, Markku & Rantala, Ville, 2015. "Social learning and corporate peer effects," Journal of Financial Economics, Elsevier, vol. 117(3), pages 653-669.
    4. Malcolm Baker & Xin Pan & Jeffrey Wurgler, 2009. "A Reference Point Theory of Mergers and Acquisitions," NBER Working Papers 15551, National Bureau of Economic Research, Inc.
    5. repec:ukb:journl:y:2017:i:242:p:28-48 is not listed on IDEAS
    6. Lou, Dong, 2009. "Attracting investor attention through advertising," LSE Research Online Documents on Economics 29311, London School of Economics and Political Science, LSE Library.
    7. Sungsin Kim & Ji-Yong Seo, 2014. "A Study On Dividend Determinants For Korea's Information Technology Firms," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 10(2), pages 1-12.
    8. Fernando Chague & Rodrigo De Losso, Bruno Giovannetti, 2017. "The Price Tag Illusion," Working Papers, Department of Economics 2017_31, University of São Paulo (FEA-USP).
    9. Chen, An-Sing & Chang, Chong-Chuo & Cheng, Lee-Young & Tu, Hsing-Yu, 2016. "Do analysts cater to investor beliefs via target prices," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 232-252.
    10. William C. Weld & Roni Michaely & Richard H. Thaler & Shlomo Benartzi, 2009. "The Nominal Share Price Puzzle," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 121-142, Spring.
    11. Kulchania, Manoj, 2013. "Catering driven substitution in corporate payouts," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 180-195.
    12. repec:eee:pacfin:v:46:y:2017:i:pa:p:14-40 is not listed on IDEAS
    13. Chague, Fernando Daniel & De-Losso, Rodrigo & Giovannetti, Bruno Cara, 2018. "Individuals neglect the informational role of prices: evidence from the stock market," Textos para discussão 467, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    14. Kristina Minnick & Kartik Raman, 2014. "Why are Stock Splits Declining?," Financial Management, Financial Management Association International, vol. 43(1), pages 29-60, March.
    15. repec:eee:empfin:v:44:y:2017:i:c:p:1-18 is not listed on IDEAS
    16. Chen, Huaizhi & Cohen, Lauren & Lou, Dong, 2016. "Industry window dressing," LSE Research Online Documents on Economics 70650, London School of Economics and Political Science, LSE Library.
    17. Perez, M. Fabricio & Shkilko, Andriy & Sokolov, Konstantin, 2015. "Factor models for binary financial data," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 177-188.
    18. repec:eee:corfin:v:46:y:2017:i:c:p:34-50 is not listed on IDEAS
    19. Birru, Justin & Wang, Baolian, 2016. "Nominal price illusion," Journal of Financial Economics, Elsevier, vol. 119(3), pages 578-598.
    20. Green, T. Clifton & Hwang, Byoung-Hyoun, 2009. "Price-based return comovement," Journal of Financial Economics, Elsevier, vol. 93(1), pages 37-50, July.
    21. Lou, Dong, 2013. "Attracting investor attention through advertising," LSE Research Online Documents on Economics 54382, London School of Economics and Political Science, LSE Library.
    22. Jiang, Zhan & Kim, Kenneth A. & Lie, Erik & Yang, Sean, 2013. "Share repurchases, catering, and dividend substitution," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 36-50.
    23. repec:dau:papers:123456789/6270 is not listed on IDEAS

    More about this item

    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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