Abstract
Internet message boards are often used to spread information in order to manipulate financial markets. Although this hypothesis is supported by many cases reported in the literature and in the media, the real impact of manipulation in online forums on financial markets remains an open question. This paper is on the effect of manipulation in internet stock message boards on financial markets by employing a unique corpus of moderated messages to investigate market manipulation. Internet message board administrators use the process of moderation to restrict market manipulation. We find that manual supervision of stock message boards by moderators does not effectively protect Internet users against manipulation. By focusing on messages that have been moderated as manipulative due to ramping, we show ramping is positively related to market returns, volatility and volume. Stocks with higher turnover, lower price level, lower market capitalization and higher volatility are more common targets of ramping.
Highlights
Internet stock message boards provide an effective medium for investors to communicate, to disseminate and discover new information
The graph identifies quite clearly that ramping is more active during trading hours, which is quite different to the general pattern for moderated posts
We believe that the reason for this is that ramping messages created outside of normal trading hours are less likely to be effective since they are more likely to be moderated before market opening
Summary
Internet stock message boards provide an effective medium for investors to communicate, to disseminate and discover new information. The value and integrity of internet stock message boards are often criticized and investors are warned not to trade on the information provided (Fraser, 2007). HotCopper is the most popular internet stock message board in Australia and forms the focus of our study. This site operates under a strict code of conduct which prohibits unethical or illegal use of the forum. Moderated posts are labeled with the reason for moderation, for example ramping, flaming or profanity. These posts serve to proxy manipulative behaviour. Using an event study methodology, we investigate whether ramping is related to stock price volatility, trade volume and returns.
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