Stock Market Manipulation Research Articles

The Manipulator's Poker: Order-Based Manipulation in the Chinese Stock Market

This paper investigates order-based manipulation, a new type of market manipulation, and its effects on investors’ behavior and market efficiency. Using a unique dataset on an order-based manipulation case from the Chinese stock market, we show the following: 1) order-based manipulation affects market liquidity and trading behaviors; 2) the manipulator pretends to be an informed trader or expects to be looked at as informed by choosing a “right” time; and 3) the manipulation rapidly changes investors' reactions to the market order/depth imbalance in the short run, and the effect gradually drops during the post-manipulation period. Our results are robust compared with alternative measures, and they offer clear implications for both theory and policy.

Which Firms are More Prone to Stock Market Manipulation?

This study empirically investigates which firms are more susceptible to successful manipulation. For this purpose, a unique dataset consisting of manipulation cases from 1998-2006 from the Istanbul Stock Exchange (ISE) were collected and firm-specific variables are used to explain these manipulations. Probit regression results show that small firms, firms with less free float rate and a higher leverage ratio are more prone to stock price manipulation. Dynamic probit analysis concludes that the probability of manipulation of a stock is significantly higher for stocks that have been previously manipulated.

Restructuring to Repair Legitimacy – A Contingency Perspective

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: This study examines the effectiveness of restructuring in repairing legitimacy after a firm is punished for financial fraud.Research Findings/Insights: We use the antecedents of fraud to distinguish between three types of financial fraud and argue that different types of such fraud affect different dimensions of legitimacy. We also identify four types of restructuring and adopt a contingency perspective to argue that the type of restructuring adopted should match the dimensions of legitimacy affected for a successful legitimacy repair, which is proxied by a positive market response when the restructuring is announced. Using a sample of Chinese listed firms, we find that disassociation from illegitimate business operations and creation of valuable business operations are more effective in repairing legitimacy after fraudulent financial reporting. Disassociation from illegitimate organizational structures and creation of monitors are more effective following embezzlement or stock market manipulation. However, no type of restructuring is effective following improper accounting practice. Market investors value creation of monitors more than they do disassociation from an illegitimate organizational structure, and attach the same value to disassociation from illegitimate business operations and creation of valuable business operations.Theoretical/Academic Implications: This study makes three contributions to the organizational legitimacy and corporate crisis management literature. First, it links corporate crises arising from financial fraud to social legitimacy. Second, it extends the number of restructuring types identified in the legitimacy literature to four, taking content and form as two dimensions. Third, it links corporate crises arising from financial fraud to the effectiveness of responsive restructurings via social legitimacy.Practitioner/Policy Implications: Firms punished for financial fraud should signal restructuring according to the nature of the fraud and address the pertinent dimensions of legitimacy.

Price Manipulation and Industry Momentum: Evidence from the Chinese Stock Market

Recent theoretical studies (Aggarwal and Wu, 2006; Mei, Wu and Zhou, 2004) show that trade-based stock price manipulation is a possible source of the momentum effect. This paper proposes three sets of testable hypotheses and provides empirical evidence for a manipulation-based explanation of momentum. Using weekly data on 14 CITIC industries in the Shanghai A-share market from 1997 to 2006, our analysis of industry momentum shows that cumulative returns first increase then decrease across holding periods, and the returns monotonically decrease across formation periods. This return pattern is consistent with a so-called pump and dump scheme, where momentum is created by manipulators and chased by speculators. We attribute the source of momentum to the positive own-autocorrelation, which dominates the cross-autocorrelation effect of industry returns. We also find that momentum profits are higher in the bull than in bear market, and most of the profits come from the gains of winning industries rather than the losses of losing industries. These empirical results, when related to some well-documented behavioral biases of Chinese speculators, tell us a possible stock-market manipulation story of momentum.

Non-Linear Time Series Invariants to Study Price Manipulation in stock market

Several studies have found the successive prices at which trades of shares are executed in a stock exchange to form times series with non-linear characteristics. Invariants of a non- linear time series of share prices contain; valuable information, about the patterns in the share prices, which factor may be useful in the analysis of share prices for various purposes. Of the commonly used invariants, entropy is found to be a useful tool in studying price manipulation in stock market. Among the various versions of entropy, simple entropy computed for the price dada o f a share, for various trading days in the period during which the share was reported to be subject to price manipulation, proves to be potential evidence for manipulation of the share's price. This paper studies the suitability of sample entropy of non-linear time series of share prices and also the selection of appropriate values for the parameters used for computation of sample entropy of a short time series of share prices, for investigating into price manipulation in stock market.

Executive Summaries of Articles

Executive Summaries of Articles

The asymmetric information and price manipulation in stock market

The interaction between asymmetrically informed traders has been mostly investigated in theoretical frameworks. Not only there are relatively few empirical studies but, if any, the mostly focus on cross-sectional analysis and use very short samples. In this study, we blend theoretic with empirical, and propose a new signalling system of turning points in the economy to examine the extent of volatility of these markets relative to their tranquil periods. The signalling system proposed here is based on the Markov-switching model. Differing from the existing literatures, the study employs three phases and time-varying transition probability, and captures the states of volatility. After examining the causality between high volatility and foreign portfolio investment (FPI) by using moving average and generalized autoregressive conditional heteroskedasticity, the portfolio's profitability of FPI and individual investors in different periods are compared. Finally, the investigation of FPI's leading effect is studied.

Parameters for Estimation of Entropy to Study Price Manipulation in Stock Market

The information theoretic concept of entropy is a useful tool in studying price manipulation in stock market. Sample entropy values computed for the price data of a scrip, for various trading days in the period during which the scrip is reported to be subject to price manipulation, prove to be potential evidence for manipulation of the scrip's price. An attempt is made in this paper to select appropriate values for the parameters used for computation of sample entropy of a short time series of stock prices.

Market manipulation: A comprehensive study of stock pools

Using a new hand collected data set, this paper examines in detail a classic account of stock market manipulation, the “stock pools” of the 1920s, which prompted the current antimanipulation rules in the United States. We examine abnormal turnover and returns and the relation between them, as well as the long-term performance of the selected stocks. We conclude that the evidence suggests informed trading rather than manipulation. Our findings have implications for regulatory policy as well as the investigation and prosecution of manipulation cases.

Stock Market Manipulation - Theory and Evidence

In this paper we present a theory and some empirical evidence on stock price manipulation in the United States. Extending the framework of Allen and Gale (1992), we consider what happens when a manipulator can trade in the presence of other traders who seek out information about the stock's true value. In a market without manipulators, these information seekers unambiguously improve market efficiency by pushing prices up to the level indicated by the informed party's information. In a market with manipulators, the information seekers play a more ambiguous role. More information seekers imply greater competition for shares, making it easier for a manipulator to enter the market and potentially worsening market efficiency. This suggests a strong role for government regulation to discourage manipulation while encouraging greater competition for information. Using a unique dataset, we then provide evidence from SEC actions in cases of stock manipulation. We find that potentially informed parties such as corporate insiders, brokers, underwriters, large shareholders and market makers are likely to be manipulators. More illiquid stocks are more likely to be manipulated and manipulation increases stock volatility. We show that stock prices rise throughout the manipulation period and then fall in the postmanipulation period. Prices and liquidity are higher when the manipulator sells than when the manipulator buys. In addition, at the time the manipulator sells, prices are higher when liquidity is greater and when volatility is greater. These results are consistent with the model and suggest that stock market manipulation may have important impacts on market efficiency.

The Role of Government in Discouraging Manipulator in the Stock Market

Based on Allen and Gale (1992), Aggarwal and Wu (2002), this article introduces dynamic transaction costs. So, we can comprehensively and theoretically discuss the major roles of government against stock market manipulation for the first time. First, the government should require all the related participants disseminate great and true information in time, in order to decrease the cost of intelligent investor. Second, the government should vigorously regulate the trading and discriminate the intelligent investor from manipulator to increase the manipulator's cost. Last, in order to decrease the intelligent investor, the government also should increase the degree of investor education

Ethical Issues in the Evolution ofCorporate Governance in China

China is establishing its corporate governance structures by emulating the stylized Anglo-American model. However, the country does not yet have the necessary formal and informal institutions, or the financial infrastructure to make these structures work effectively. Corruption, stock market manipulation, tax cheating, fraudulent dealing, all manners of plundering of state assets and the lack protection of shareholders' rights are some of the more conspicuous manifestations of the ethical issues that have emerged in this mismatch. This study shows how these issues arise in the context of the characteristics of country's economic and corporate governance development. It evaluates various potential policy responses that may be implemented to improve governance effectiveness and diminish the damage from those problems.

Day end returns—stock price manipulation

In this paper, we examine if closing prices are manipulated. Earlier research has shown that closing prices are one of the most used benchmarks against which trader performance is evaluated. If a trader takes a big net position a given day, it is likely that he wants to enhance his performance by manipulating the closing price. We build a simple regression model to test for closing price manipulation in the Finnish stock market. Robustness checks were made for the effect of: (a) size of the net position; (b) differences in returns across firms; (c) different size of net position for different firms, block trades and spread trades. The results before close, for the base case, were in line with our hypothesis. However, the robustness checks showed that block trades and spread trades explained a part, but not all, of our results. The results after close were generally weak, but tilted towards our hypothesis.

THE ROLE OF STOCK DIVIDENDS IN DEFINING INCOME, DEVELOPING CAPITAL MARKET RESEARCH AND EXPLORING THE ECONOMIC CONSEQUENCES OF ACCOUNTING POLICY DECISIONS

Allegations that stock dividends serve as a vehicle for deceptive financing, evasion of taxes, misleading financial reporting, and stock market manipulation resulted in legislation that prohibited their use in the United States in the latter part of the 19th century. In the 20th century, efforts of the Supreme Court to determine the economic substance and taxability of stock dividends catalyzed a pioneering effort by the Court to define income within the 16th Amendment. As early as 1930 market reactions to stock dividends were investigated; this may have been one of the earliest forms of capital market research. This paper examines the effects of stock dividends on the development of accounting.

Regulation of Stock Market Manipulation

Regulation of Stock Market Manipulation

Securities: Stock Market Manipulation at Common Law and under Recent Federal Securities Legislation

Securities: Stock Market Manipulation at Common Law and under Recent Federal Securities Legislation

Stock Market Manipulation

Stock Market Manipulation

Corporations: Stock Market Manipulation: Rescission for Fraud

Corporations: Stock Market Manipulation: Rescission for Fraud

Illegality of Stock Market Manipulation

Illegality of Stock Market Manipulation

Liability for Stock Market Manipulation

Liability for Stock Market Manipulation