TY  - JOUR
AU  - Baker,Malcolm
AU  - Greenwood,Robin
AU  - Wurgler,Jeffrey
TI  - Catering Through Nominal Share Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13762
PY  - 2008
Y2  - January 2008
UR  - http://www.nber.org/papers/w13762
L1  - http://www.nber.org/papers/w13762.pdf
N1  - Author contact info:
Malcolm Baker
Baker Library 261
Harvard Business School
Soldiers Field
Boston, MA  02163
Tel: 617/495-6566
Fax: 617/496-5271
E-Mail: mbaker@hbs.edu

Robin Greenwood
Harvard Business School
Baker Library 267
Soldiers Field
Boston, MA 02163
Tel: 617/495-6979
Fax: 617/496-8443
E-Mail: rgreenwood@hbs.edu

Jeffrey Wurgler
Stern School of Business, Suite 9-190
New York University
44 West 4th Street
New York, NY  10012
Tel: 212/998-0367
Fax: 212/995-4233
E-Mail: jwurgler@stern.nyu.edu
AB  - 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 will maintain share prices at lower levels, and vice-versa. Using measures of time-varying catering incentives based on valuation ratios, split announcement effects, and future returns, we find empirical support for the predictions in both time-series and firm-level data. Given the strong cross-sectional relationship between capitalization and nominal share price, an interpretation of the results is that managers may be trying to categorize their firms as small firms when investors favor small firms.
ER  -