Were the Stock Pools Manipulative?
University of Virginia Legal Studies Working Paper No. 96-8
Posted: 13 Jun 1998
Date Written: May 1996
The main rationale that Congress provided for the Securities Exchange Act of 1934 was to eliminate manipulation, and the primary evidence of manipulation was the existence of "pools". Pools were concerted purchases and sales of a particular stock by a group of financiers who shared in the resulting gains or losses. Congress and most subsequent commentators have described the pools as efforts to manipulate the prices of the target stocks. This paper seeks to reevaluate the evidence relating to the pools. It argues that there is little or no evidence that they used such classically manipulative devices as wash sales or false publicity. The paper then uses event study methodology to analyze the price behavior of stocks that were the subject of pools. It finds that a sample of pool stocks earned abnormally high returns at the beginning of a pool, but that those abnormally high returns were not followed by abnormally low returns. That pattern is inconsistent with manipulation, although consistent with informed trading. The paper concludes that the evidence does not support either the notion that pools were a form of trade based manipulation or that they were a form of fraud.
JEL Classification: G12, G14, K22
Suggested Citation: Suggested Citation