The low price anomaly and the Intriguing Case of the Polish Stock Market

Adam Zaremba,Szymon Okon,Andrzej Nowak,Przemyslaw Konieczka

doi:10.5755/j01.ee.27.2.13490

Abstract

This study investigates the low-price effect on the Polish stock market. By adopting sorting, cross-sectional tests and checks of the monotonic relation, we have examined the performance of the portfolios formed on the prices of over 850 companies listed on the Polish stock market within the years 2000-2014. Contrary to the globally prevailing evidence, the expensive stocks have significantly outperformed the cheap stocks. Additional sorts on value, size and momentum may be used further to improve the price-based strategies while the strongest anomaly has been identified among the growth companies. We hypothesize that the reverse character of the low-price anomaly may be explained by the impact of another phenomena: the underperformance of lottery-stocks. With the exception of the growth stocks, the reverse low-price effect is no longer significant after the exclusion of NewConnect companies. Finally, by adopting an alternative methodology, we have provided convincing out-of-sample evidence in support of the hypothesis of Baker et al. (2009) stating that corporate managers cater to investors by splitting their company shares in response to time-varying catering incentives.DOI: http://dx.doi.org/10.5755/j01.ee.27.2.13490

Highlights

Studies of cross-sectional asset pricing anomalies have proliferated in academic literature in past decades
We provide evidence that the relative performance of cheap stocks is correlated with the frequency of splits conducted by corporate managers
Contrary to the numerous international studies, we have identified a reverse low-price effect, which leads to the observation that high-priced stocks significantly outperform low-priced stocks

Summary

Introduction

Studies of cross-sectional asset pricing anomalies have proliferated in academic literature in past decades. While Harvey et al (2015) reviewed 315 asset-pricing factors from tier-one journals, Jacobs (2015) studied 100 cross-sectional effects from academic publications. These publications sparked a lot of interest among investors. One particular cross-sectional anomaly has somehow largely escaped the attention of the academic community: the lowprice effect. The aim of this paper is to investigate the low-price anomaly on the Polish market and its potential interactions with size, value and momentum effects. Using a methodology alternative to Baker et al (2009), we examine the catering hypothesis put forward by these authors, while using Polish share prices

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Conclusion