Ex-Day Returns of Stock Distributions: An Anchoring Explanation

We offer a new anchoring explanation for the ex-day abnormal returns of stock distributions, including stock dividend distributions, splits, and reverse splits. We propose that investors tend to anchor on cum-day prices in valuating ex-distribution stocks, resulting in a positive association between ex-day returns and adjustment factors. We find that this positive return-factor relation exists for all three types of stock distributions and in both the pre- and post-decimalization periods. Furthermore, we find that this positive return-factor relation is more pronounced among events that are more subject to investors' anchoring propensity, featured by less investor attention, greater arbitrage difficulty, greater valuation uncertainty, less investor sophistication, and higher market sentiment. Last, using brokerage account data, we show that stocks that are traded by investors with more investment experience demonstrate a weaker return-factor relation. History: Accepted by Lauren Cohen, finance. Funding: E. C. Chang acknowledges the funding of Chung Hon-Dak Endowed Professorship in Finance. Y. Luo acknowledges the financial support from National Natural Science Foundation of China [NSFC Projects 71772049 and 71402032]. J. Ren acknowledges the financial support from the University of Macau [MYRG071(Y1-L2)-FBA11-RJJ and MYRG2015-00158-FBA]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2017.2843. Keywords: economics * behavior and behavioral decision making * finance * asset pricing * anchoring * splits * stock dividends
1. Introduction Stock distributions, including stock dividend payments, splits, and reverse splits, are cosmetic accounting changes without real impact on business operations. Nontrivial abnormal returns on the ex-days of stock [...]