Why Do Share Price Levels Matter? Investor Clienteles, Monitoring and Firm Performance
Chitru S. Fernando
University of Oklahoma - Michael F. Price College of Business
Vladimir A. Gatchev
University of Central Florida - Department of Finance
Paul A. Spindt
Tulane University - A.B. Freeman School of Business
We develop a model in which firms select share prices by trading off the benefits of institutional investor monitoring against the value of a broad shareholder base. Firms that anticipate small gains from institutional monitoring target a retail investor clientele by setting lower share prices while firms that anticipate large gains from institutional monitoring target an institutional investor clientele by setting higher share prices. Our model also implies that high-priced stocks will be of higher quality than low-priced stocks, and that higher quality firms will more persistently maintain their quality over time and choose higher split-to prices when they split their shares. Our empirical findings confirm these predictions, providing strong support for our notion that share price levels are endogenously determined based on a firm's preferred ownership clientele.
Number of Pages in PDF File: 46
Keywords: Share price, stock splits, firm quality, S&P ranking, institutional ownership, monitoring
JEL Classification: C24, G12, G30
Date posted: March 8, 2004 ; Last revised: September 19, 2011
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