Distorted Stock Prices, Behavioral Bias, and Stock Splits

Distorted prices misguide managerial incentives and resource allocation. Distorted prices may occur when firms' stock prices are near their 52-week highs because investors tend to perceive the stocks as relatively overvalued and are reluctant to bid prices higher even if new information warrants it. We show that managers can deal with the distorted price problem using stock splits, which call attention and induce brokerage houses to produce more information regarding the firms. Furthermore, consistent with our argument, we find that the firms' likelihood of engaging stock splits increases with CEO wealth-performance sensitivity, and their investment-price sensitivity increases following stock splits