Why Do Share Price Levels Matter? Investor Clienteles, Monitoring and Firm Performance

46 Pages Posted: 8 Mar 2004 Last revised: 19 Sep 2011

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business

Vladimir A. Gatchev

University of Central Florida - Department of Finance

Paul A. Spindt

Tulane University - A.B. Freeman School of Business

Abstract

We develop a model in which firms select share prices by trading off the benefits of institutional investor monitoring against the value of a broad shareholder base. Firms that anticipate small gains from institutional monitoring target a retail investor clientele by setting lower share prices while firms that anticipate large gains from institutional monitoring target an institutional investor clientele by setting higher share prices. Our model also implies that high-priced stocks will be of higher quality than low-priced stocks, and that higher quality firms will more persistently maintain their quality over time and choose higher split-to prices when they split their shares. Our empirical findings confirm these predictions, providing strong support for our notion that share price levels are endogenously determined based on a firm's preferred ownership clientele.

Keywords: Share price, stock splits, firm quality, S&P ranking, institutional ownership, monitoring

JEL Classification: C24, G12, G30

Suggested Citation

Fernando, Chitru S. and Gatchev, Vladimir A. and Spindt, Paul A., Why Do Share Price Levels Matter? Investor Clienteles, Monitoring and Firm Performance. Available at SSRN: https://ssrn.com/abstract=515222 or http://dx.doi.org/10.2139/ssrn.515222

Chitru S. Fernando (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

Adams Hall
307 West Brooks Street
Norman, OK 73019-4004
United States
405-325-2906 (Phone)
405-325-7688 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/F/Chitru.Fernando-1/

Vladimir A. Gatchev

University of Central Florida - Department of Finance ( email )

Orlando, FL 32816-1400
United States
(407) 823-3694 (Phone)
(407) 823-6676 (Fax)

HOME PAGE: http://www.bus.ucf.edu/vgatchev/

Paul A. Spindt

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5413 (Phone)

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