Behavioral Bias, Distorted Stock Prices, and Stock Splits

56 Pages Posted: 5 Mar 2020 Last revised: 7 Jun 2021

See all articles by Fengfei Li

Fengfei Li

Deakin University - Deakin Business School

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: June 5, 2021

Abstract

Studies show that investors’ anchoring bias associated with past 52-week highs of firms’ stock prices leads to undervaluation. We propose that the resulting price distortion misguides managerial incentives and resource allocation, and motivates managers to split stocks (to induce more analyst coverage and attract more investors). Indeed, we find that firms are more likely to split stocks when subject to the anchoring bias, especially when having higher profitability but undervalued. Furthermore, the likelihood of stock splits increases with CEO wealth-performance sensitivity, and firms’ investment-price sensitivity increases after stock splits. Our findings provide a rationale and managerial incentives for stock splits.

Keywords: Distorted prices; Anchoring bias; Stock split; Information production; Investment-price sensitivity

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

Suggested Citation

Li, Fengfei and Lin, Ji-Chai and Lin, Tse-Chun and Shang, Longfei, Behavioral Bias, Distorted Stock Prices, and Stock Splits (June 5, 2021). Available at SSRN: https://ssrn.com/abstract=3535243 or http://dx.doi.org/10.2139/ssrn.3535243

Fengfei Li (Contact Author)

Deakin University - Deakin Business School ( email )

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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