Catering through Nominal Share Prices

Malcolm Baker; Robin Greenwood; Jeffrey Wurgler

doi:10.1111/j.1540-6261.2009.01511.x

Journal of Finance Vol. 64 No. 6 2009

Catering through Nominal Share Prices

Malcolm Baker^{1,2,3,4,5,6,7}; Robin Greenwood^{1,2,3,4,5,6,7}; Jeffrey Wurgler²

¹ Pennsylvania State University · ² National Bureau of Economic Research · ³ University of Arizona · ⁴ Stockholm School of Economics · ⁵ Dana-Farber/Harvard Cancer Center · ⁶ Library and Archives Northern Territory · ⁷ New York University

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Abstract

We propose and test a catering theory of nominal stock prices. The theory predicts that when investors place higher valuations on low‐price firms, managers respond by supplying shares at lower price levels, and vice versa. We confirm these predictions in time‐series and firm‐level data using several measures of time‐varying catering incentives. More generally, the results provide unusually clean evidence that catering influences corporate decisions, because the process of targeting nominal share prices is not well explained by alternative theories.

DOI: 10.1111/j.1540-6261.2009.01511.x
Volume: 64
Issue: 6
Pages: 2559-2590
Language: en
Sources: openalex crossref

Catering through Nominal Share Prices

Abstract

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