Abstract:
In this paper, we focus on the low price premium effect and suggest nominal price illusion is one of the main causes from behavioral finance perspective. Using a dataset which contains 175,736 firm-month observations of Chinese A-share listed companies from 1999 to 2014, we document that there is indeed a superior performance attached to low price stocks, i.e., the low price premium effect. What’s more, the bigger the size of individual investors, the stronger the low price premium effect, which further supports our theoretical expectation. Meanwhile, we find evidence that institutional ownership, security analyst coverage, and short sales can all significantly alleviate the low price premium effect, thereby contributing to the rectification of mispricing and resource misallocation in capital markets. Furthermore, we find that for the sake of maximizing their firms’ market value, firm managers would take advantage of investors’ particularly individual investors’ nominal price illusion to carter those investors’ preference for relatively low price stocks through issuing stock dividends. Our findings would give helpful insights for market operations and policy making into revealing the puzzle of low price premium effect and improving pricing efficiency in China.
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