Can Firms Break Investors’ 52-Week High Anchoring Bias?

Abstract

Studies show that investors’ anchoring bias associated with past 52-week highs of firms’ stock prices leads to undervaluation. We propose that the resulting price distortion misguides managerial incentives and resource allocation, and motivates managers to split stocks (to induce more analyst coverage and attract more investors). Indeed, we find that firms are more likely to split stocks when subject to the anchoring bias, especially when having higher profitability but undervalued. Furthermore, the likelihood of stock splits increases with CEO wealth-performance sensitivity, and firms’ investment-price sensitivity increases after stock splits. Our findings provide a rationale and managerial incentives for stock splits.