Can Firms Break Investors’ 52-Week High Anchoring Bias?
50 Pages Posted: 5 Mar 2020 Last revised: 20 Jul 2020
Date Written: July 20, 2020
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: Suggested Citation