Ex-Day Returns of Stock Distributions: An Anchoring Explanation

Management Science, Forthcoming.

47 Pages Posted: 11 Oct 2014 Last revised: 9 Apr 2017

See all articles by Eric C. Chang

Eric C. Chang

University of Hong Kong - School of Business

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Yan Luo

Fudan University

Jinjuan Ren

University of Macau

Date Written: October 23, 2016

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. Lastly, using brokerage account data, we show that stocks that are traded by investors with more investment experience demonstrate a weaker return-factor relation.

Keywords: anchoring; ex-day return; splits; stock dividends

JEL Classification: G12, G14

Suggested Citation

Chang, Eric Chieh C. and Lin, Tse-Chun and Luo, Yan and Ren, Jinjuan, Ex-Day Returns of Stock Distributions: An Anchoring Explanation (October 23, 2016). Management Science, Forthcoming. . Available at SSRN: https://ssrn.com/abstract=2508238 or http://dx.doi.org/10.2139/ssrn.2508238

Eric Chieh C. Chang

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yan Luo

Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Jinjuan Ren (Contact Author)

University of Macau ( email )

Room 4079, E22, Faculty of Business Administration
University of Macau
Taipa, Taipa Nil
Macau
(853) 8822-4185 (Phone)

HOME PAGE: http://www.umac.mo/fba/staff/susanren.html

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