Can Firms Break Investors’ 52-Week High Anchoring Bias?

50 Pages Posted: 5 Mar 2020 Last revised: 20 Jul 2020

See all articles by Fengfei Li

Fengfei Li

Deakin University - Faculty of Business and Law

Ji-Chai Lin

Hong Kong PolyU

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Longfei Shang

Hong Kong Polytechnic University

Date Written: July 20, 2020

Abstract

Should managers be concerned with undervaluation and distorted informational role of stock price induced by investors’ 52-week high anchoring bias? We argue that they should if the problem is severe, and firms can deal with it by splitting their stocks to attract investors’ attention and induce brokerage houses to produce more information on the firms. Indeed, we find that (i) firms are more likely to announce stock splits when their stock prices are near their past 52-week highs, (ii) split firms are undervalued prior to their split announcements, and undervaluation gradually disappears after stock splits, and (iii) the market also responds more efficiently to earnings announcements in the post-split period. While addressing the anchoring bias, our study also sheds light on the stock split puzzle by providing a new explanation for why firms split their shares.

Keywords: Anchoring bias; Stock split; 52-week high; Underreaction; Information production; Post-earnings announcement drift

JEL Classification: D82; G12; G14; G41; M41

Suggested Citation

Li, Fengfei and Lin, Ji-Chai and Lin, Tse-Chun and Shang, Longfei, Can Firms Break Investors’ 52-Week High Anchoring Bias? (July 20, 2020). Available at SSRN: https://ssrn.com/abstract=3535243 or http://dx.doi.org/10.2139/ssrn.3535243

Fengfei Li (Contact Author)

Deakin University - Faculty of Business and Law ( email )

Burwood, Victoria 3215
Australia

Ji-Chai Lin

Hong Kong PolyU ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

Tse-Chun Lin

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

Pokfulam Road
Hong Kong
China

Longfei Shang

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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