Catering Through Nominal Share Prices
46 Pages Posted: 16 Jan 2008 Last revised: 12 Jan 2009
Date Written: January 9, 2008
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.
Keywords: Stock splits, catering, payout policy, investor demand, nominal share prices
JEL Classification: G10, G12, G30, G35
Suggested Citation: Suggested Citation