STOCK PRICE ANCHORING

Mustafa Disli, Koen Inghelbrecht, Koen Schoors and Hannes Stieperaere

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

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.

Keywords: Anchoring effect; heuristics; anomaly; firm value; stock prices (search for similar items in EconPapers)
JEL-codes: G02 G11 G14 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2019-03
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:19/966

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