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Catering through Nominal Share Prices
Author(s) -
BAKER MALCOLM,
GREENWOOD ROBIN,
WURGLER JEFFREY
Publication year - 2009
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2009.01511.x
Subject(s) - incentive , share price , stock price , stock (firearms) , economics , monetary economics , business , microeconomics , financial economics , econometrics , stock exchange , series (stratigraphy) , finance , mechanical engineering , paleontology , engineering , biology
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.