Low price anchors in equity market

Abstract

This study investigates whether firm’s management uses split ratios to target low price anchors in order to impact post-split ownership. We report anchoring bias for the lowest ranges of prices in the equity market and find specific price anchors among individual investors in the secondary equity market. Initial founders/promoters may use these price anchors and target-specific post-split prices to achieve the desired ownership structure between individual and institutional investors. This study addresses the role of nominal prices in choosing to split shares in the context of a firm’s ownership structure. Our findings amplify the fact that the psychological biases of individual investor behaviour depend on share price levels, which affects the ownership structure of a firm. Our study makes three contributions. First, we provide evidence for anchoring basis among individual investors for the lowest price ranges. Thus, companies use higher split ratios to target the lowest price ranges to disperse ownership among individual investors. Second, we find that institutional investors reduce ownership in companies that target the lowest price anchors post-split. Third, promoters may use price anchors to disperse ownership among individual investors, thus maintaining control.