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Catering Through Nominal Share Prices

Author

Listed:
  • 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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    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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