Norms, catering incentives and nominal share prices: European evidence

Abstract

PURPOSE OF THE STUDY The purpose of this thesis is to examine what drives active nominal share price management and how nominal share prices behave over time. First, I investigate if real share prices are decreasing over time and nominal share prices rigid. I then examine the effect of the adoption of the euro on share price levels. Finally, I especially concentrate on determining if norms and catering incentives affect a firm's share price choice and the decision to split.

DATA I use Thomson Datastream data for company financials and market data, and the Securities Data Company's (SDC) Non-U.S. Initial Public Offerings (IPO) database for new listings. The sample consists of 92,856 firm-year observations between 1980 and 2008 in 11 European markets. There are in total 1,803 stock split events and 917 IPOs in the sample.

RESULTS I document evidence of share price norms in Europe. Norms explain up to 33% of the variation in the (log) split adjustment and up to 45% of the variation in (log) IPO prices. Drifting away from the norms price also seems to be the key motivating driver for the decision to split. Real share prices are decreasing over time in all sampled countries. Evidence on rigid nominal share price levels is inconclusive, although it is more likely that nominal prices are rigid than not. The introduction of the euro seems to have fuelled a permanent shift in share price levels.

The data also reveals that catering incentives for low-priced stocks affect the choice of IPO price and the propensity to split. When low-priced stocks trade at a relatively high premium over high-priced stocks, firms are more likely to split their stock and choose a low IPO price. Managers do not appear to act small by choosing a low price when catering incentives are high, or choose to split when recent splits have earned high abnormal ex-date returns.