Understanding the Evolution of the Share Price Norm

Abstract

Why do firms manage their stock price levels? Building on the catering hypothesis and institutional investor preference literature, we propose a generalized catering hypothesis that managers cater their share price level to different types of investor (individual vs institutional) in order to attract them, conditional on the firm’s preferences as to ownership mix. We show that an institutional ownership premium provides strong explanatory power to the change in share price norm. This evidence supports our hypothesis that managers cater their share price level to the preference of institutional investors, but only when there is substantial benefit in doing so.

Keywords: Institutional ownership; Share price puzzle; IPO; Stock split; Norm hypothesis; Catering hypothesis

JEL Classification: G02, G10, G12