Behavioral bias, distorted stock prices, and stock splits

Fengfei Li, Ji-Chai Lin, Tse-Chun Lin and Longfei Shang

Journal of Banking & Finance, 2023, vol. 154, issue C

Abstract: We propose that firms use stock splits as a means of attracting attention and inducing information production to correct price distortion caused by investors’ 52-week high anchoring bias. Our analysis shows that firms are more likely to split stocks when their prices are near 52-week highs, especially if they are highly profitable and undervalued. After splits, undervaluation gradually disappears. Moreover, these splits are associated with a slower market reaction and a more positive post-split drift, consistent with the notion that investors’ anchoring bias hinders price adjustment, leading to a gradual price correction. In addition, the likelihood of such splits increases with CEO wealth-performance sensitivity, and investment-price sensitivity increases following splits. Our evidence suggests that firms utilize stock splits to correct mispricing induced by investors’ 52-week high anchoring bias.

Keywords: Distorted prices; Anchoring bias; Stock split; Information production; Investment-price sensitivity (search for similar items in EconPapers)
JEL-codes: D82 G12 G14 G41 M41 (search for similar items in EconPapers)
Date: 2023
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:eee:jbfina:v:154:y:2023:i:c:s0378426623001449

DOI: 10.1016/j.jbankfin.2023.106939

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