Rational Stock Market Catering

56 Pages Posted: 25 May 2016 Last revised: 25 Jul 2016

See all articles by Murray Z. Frank

Murray Z. Frank

University of Minnesota

Ali Sanati

American University

Date Written: July 24, 2016

Abstract

Tests using American data from 1970 to 2015 support the behavioral hypothesis that firms Cater to investor whims. We show that the standard tests cannot distinguish between the behavioral interpretation, and a rational model in which the firm optimally chooses investment, equity issuance, and dividends; while investors optimally choose consumption, equity, and bank account deposits. The rational model shows the importance of two-way financial flows between investors and firms that are generally ignored in the literature. Using booms, sentiment, and behavioral mispricing measures, we construct new tests of behavioral Catering Theory. In all cases that theory is rejected.

Keywords: Investment, Equity Issuance, Dividends, Share Repurchases, Catering

JEL Classification: G31, G32, G35

Suggested Citation

Frank, Murray Z. and Sanati, Ali, Rational Stock Market Catering (July 24, 2016). Available at SSRN: https://ssrn.com/abstract=2783533 or http://dx.doi.org/10.2139/ssrn.2783533

Murray Z. Frank (Contact Author)

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5678 (Phone)

Ali Sanati

American University ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

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