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Ex-Day Returns of Stock Distributions: An Anchoring Explanation

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  • Eric C. Chang

    (Faculty of Business and Economics, University of Hong Kong, Hong Kong, China)

  • Tse-Chun Lin

    (Faculty of Business and Economics, University of Hong Kong, Hong Kong, China)

  • Yan Luo

    (School of Management, Fudan University, 200433 Shanghai, People’s Republic of China)

  • Jinjuan Ren

    (Faculty of Business Administration, University of Macau, Taipa, Macau, China)

Abstract

We offer a new anchoring explanation for the ex-day abnormal returns of stock distributions, including stock dividend distributions, splits, and reverse splits. We propose that investors tend to anchor on cum-day prices in valuating ex-distribution stocks, resulting in a positive association between ex-day returns and adjustment factors. We find that this positive return-factor relation exists for all three types of stock distributions and in both the pre- and post-decimalization periods. Furthermore, we find that this positive return-factor relation is more pronounced among events that are more subject to investors’ anchoring propensity, featured by less investor attention, greater arbitrage difficulty, greater valuation uncertainty, less investor sophistication, and higher market sentiment. Last, using brokerage account data, we show that stocks that are traded by investors with more investment experience demonstrate a weaker return-factor relation.

Suggested Citation

  • Eric C. Chang & Tse-Chun Lin & Yan Luo & Jinjuan Ren, 2019. "Ex-Day Returns of Stock Distributions: An Anchoring Explanation," Management Science, INFORMS, vol. 65(3), pages 1076-1095, March.
  • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:3:p:1076-1095
    DOI: 10.1287/mnsc.2017.2843
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    References listed on IDEAS

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    Cited by:

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    2. Víctor Alberto Pena & Alina Gómez-Mejía, 2019. "Effect of the anchoring and adjustment heuristic and optimism bias in stock market forecasts," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 11(2), pages 389-409, November.

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