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Catering through Nominal Share Prices





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    • Baker and Greenwood are at the Harvard Business School and National Bureau of Economic Research and Wurgler is at the NYU Stern School of Business and the National Bureau of Economic Research. For helpful comments, we thank Yakov Amihud; Lauren Cohen; Ken French; Sam Hanson; Harrison Hong; Byoung-Hyoun Hwang; Eric Kelley; Owen Lamont; Ulrike Malmendier; Ashwin Malshe; Jay Ritter; Andrei Shleifer; Erik Stafford; Dick Thaler; and seminar participants at the American Finance Association, Arizona State, Copenhagen Business School, Dartmouth, Helsinki School of Economics, Kellogg, the NBER Behavioral Finance conference, the Norwegian School of Management, NYU Stern, Penn State, Stockholm School of Economics, SUNY Binghamton, the University of Arizona, the University of Florida, and the University of North Carolina. We thank Jay Ritter for providing data. Baker and Greenwood gratefully acknowledge financial support from the Division of Research of the Harvard Business School.


We propose and test a catering theory of nominal stock prices. The theory predicts that when investors place higher valuations on low-price firms, managers respond by supplying shares at lower price levels, and vice versa. We confirm these predictions in time-series and firm-level data using several measures of time-varying catering incentives. More generally, the results provide unusually clean evidence that catering influences corporate decisions, because the process of targeting nominal share prices is not well explained by alternative theories.