Abstract
Abstract This paper studies information-based manipulation in a setting where sophisticated investors have access to an independent source of information. It is shown that investors' access to independent information is crucial to support truthful announcements by the manipulator. However, even manipulated announcements provide useful information to investors, contributing to improved price efficiency and a smaller risk premium. This is true even though investors substitute some costly independent information by the costless announcement. Therefore, manipulation is not bad per se: it is just not as good as truth-telling. Policymakers aiming for improved price efficiency should entice the manipulator to announce truthfully more often, and not to silence him. To achieve it, policymakers can: (i) increase scrutiny and penalties for real (not apparent) manipulation; (ii) promote investors' access to high quality independent sources of information; (iii) eliminate short sales restrictions. Any of these measures help the manipulator to commit to more truthful announcements and work to his benefit since manipulation is actually a bad deal for the manipulator. Manipulation exists only because the manipulator cannot credibly commit to announce truthfully.
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