Stock Price Anchoring

31 Pages Posted: 12 Feb 2021

See all articles by Mustafa Disli

Mustafa Disli

Ghent University - Faculty of Economics and Business Administration

Koen Inghelbrecht

Ghent University - Department of Economics

Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE); Ghent University - Department of General Economics

Hannes Stieperaere

Ghent University - Department of Financial Economics

Date Written: December 13, 2020

Abstract

We provide evidence that stock prices are positively correlated with firm value in a cross-sectional framework. This is surprising as company managers can alter the stock price at their own discretion by changing the number of shares outstanding. Even more puzzling is that firms with a high stock price at the end of the year have lower returns in the subsequent year. After controlling for common risk factors, this underperformance amounts to 4.56% per year. We argue that investors wrongly interpret easily available information such as the stock price as a piece of relevant information signaling firm quality. As a result, when judging firm value, investors “anchor” their valuation to the share price and place a higher valuation on high-priced firms.

Keywords: Firm value, stock prices, anomaly, anchoring, price-quality heuristic

JEL Classification: G02, G11, G14

Suggested Citation

Disli, Mustafa and Inghelbrecht, Koen and Schoors, Koen J. L. and Stieperaere, Hannes, Stock Price Anchoring (December 13, 2020). Available at SSRN: https://ssrn.com/abstract=3749398 or http://dx.doi.org/10.2139/ssrn.3749398

Mustafa Disli

Ghent University - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

Koen Inghelbrecht (Contact Author)

Ghent University - Department of Economics ( email )

Sint-Pietersplein 5
Ghent, B-9000
Belgium
+32 9 264 89 77 (Phone)

HOME PAGE: http://users.ugent.be/~kjinghel/

Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE) ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium
+32 9 264 34 78 (Phone)
+32 9 265 35 99 (Fax)

Ghent University - Department of General Economics ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium
+32 9 264 34 78 (Phone)
+32 9 264 35 99 (Fax)

Hannes Stieperaere

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium

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