Behavioural finance is a growing field of study in both corporate finance and asset pricing. It seeks for answers to questions that are hard to be explained by traditional finance theories. Researchers investigate seemingly irrational decisions made by corporate managers and investors, applying findings from the psychology literature on human beings’ cognitive bias in decision making.
One interesting feature observed in financial markets is anchoring. Anchoring is a cognitive bias that describes the common human tendency to rely excessively on the information offered in the past (the ‘anchor’) when making decisions. CCFin researchers have shown that corporate managers rely on initial public offer (IPO) price when they are setting firms’ nominal stock price level. IPO prices are natural anchors because they are the first public prices observed by investors. We show that nominal prices of most stocks around the world tend to revert to their initial public offer (IPO) prices and corporate actions, such as (reverse) stock-split and large dividend payout, maintain these nominal stock price anchors.