Information-based Market Manipulation and Wealth Transfer Effect: Evidence from Insiders’ Shares Selling

Abstract

Recently, a large number of cases show that information-based market manipulation has become a serious problem in China’s capital market. Information-based market manipulation involves the distribution of information as a mean of boosting stock prices. Different from traditional market manipulation, information-based market manipulation involves both listed companies and institutional investors in the secondary market. Institutional investors usually collude with executives from listed companies to disseminate information to boost share prices before dumping their holdings. Information-based market manipulation has longer-term and wider-ranging effects on the stock market, which is more likely to mislead market participants and wealth transfer.Prior research indicates that insiders time their trades strategically around voluntary disclosures to maximize their wealth. However, there is little evidence to show the association between information-based market manipulation and wealth transfer. This is the question we want to examine in this paper. Instead of treating voluntary disclosures as exogenous, we consider information disclosure as a strategic plan that allows insiders to profitably trade in their companies’ stocks. Specifically, we investigate whether managers change the timing or content of information disclosure in response to insider trading considerations.Using insider selling activities in China’s A-share market between 2008 and 2016, this paper examines the effect of information-based market manipulation and wealth transfer, including its characteristics, motivation and economic consequences. Empirical analysis shows that information-based market manipulation happens during insider selling, as shown by the distribution of good news and abnormal stock price movements. The motivation of information-based market manipulation is wealth transfer. Taking advantage of the release of misleading good news, insiders sell their shares when stock prices go up. Insider selling activities cannot be explained by liquidity improvement as insiders would buy these stocks when stock prices go down. As to economic consequences, stock prices continue to fall and the future performance get worse after information-based market manipulation. This reflects that the distribution of good news during insider selling tends to deceive investors.The contribution of this paper is threefold. Firstly, it reveals a new path that the captical market may affect the real economy. We find that managers may distort companies’ production and operation activities in order to sell their shares at a high price. Secondly, it expands the existing literature on market manipulation by studying the relationship between information-based market manipulation and wealth transfer during the period of insiders’ shares selling. This paper is the first empirical study on information-based market manipulation based on big data in China, which supplements the existing literature mainly based on case analysis or theoretical analysis. Thirdly, the results show that information disclosure arbitrage may be the root of market mispricing, which provides new evidence for the debate and reasons about the divergence between the virtual economy and the real economy. The findings of this paper also have important implications for the regulation of information-based market manipulation and insider trading.