Behavioral Bias, Distorted Stock Prices, and Stock Splits
56 Pages Posted: 5 Mar 2020 Last revised: 7 Jun 2021
Date Written: June 5, 2021
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: Suggested Citation