Catering Through Nominal Share Prices

We develop and test a catering theory of nominal stock prices. The theory predicts that managers set share prices at lower levels when investors place higher valuations on low-price firms and at higher levels when investors favor high-price firms. Using several measures of time-varying catering incentives based on valuation ratios, split announcement effects, and future returns, we find empirical support for these predictions in both time-series and firm-level data. The crosssectional relationship between capitalization and nominal share price suggests that managers may be trying to categorize their firms as small firms when investors favor small firms. ∗ For helpful comments, we thank Lauren Cohen, Ken French, Andrei Shleifer, and Erik Stafford. We thank Jay Ritter for providing data. Baker and Greenwood gratefully acknowledge financial support from the Division of Research of the Harvard Business School.