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Catering Through Nominal Share Prices

Malcolm Baker, Robin Greenwood and Jeffrey Wurgler ()

No 13762, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G12 G3 (search for similar items in EconPapers)
Date: 2008-01
Note: AP CF
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Published as 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.

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