Is Stock Manipulation Bad? Questioning the Conventional Wisdom with Evidence from the Israeli Experience

Posted: 14 Sep 2000

See all articles by Omri Yadlin

Omri Yadlin

Tel Aviv University - Buchmann Faculty of Law

Abstract

The conventional wisdom about stock manipulation is that any trading scheme that is not designed for investment purposes but, rather, for the purpose of inflating or deflating the market price is fraudulent. This paper treats manipulation as a form of communication between the manipulator and the market. As with any communication, it may sometimes be fraudulent, but often it is based on the manipulator's knowledge, or genuine belief, that a stock is being traded at a discount (or premium). Under the assumptions of the CAPM, such an informed party should trade for investment purposes, but liquidity and risk constraints, which are ignored by the CAPM, often do not allow informed parties to invest and force them to bid the market up (or down). The manipulator's effect on the market arouses analyst attention and forces the market to update its evaluation of the firm's value. The more liquid the market, the faster the market updates its evaluation of the firm's value, and thus the more valuable it is for the manipulator to base the scheme on information. I support this theoretical claim with an empirical study of manipulation indictments brought by the Israeli Securities Agency (ISA) during the last decade. The study treats each indictment as a competition between two rival analysts: the ISA recommends a "hold" at the pre-manipulation price and a "sell" at the post manipulation price; the manipulator recommends a "buy" at the pre-manipulation price and a "hold" at the post manipulation price. Examining the long-run performance of the forty-five stocks that were the subjects of the indictments, I find that investors could gain by following the advice of the ISA. However, looking at the long-run performance of the twenty-two most liquid stocks, it turns out that these stocks experienced a significant positive abnormal return. This finding provides support for my claim that information is a driving force behind many manipulative schemes, especially those that are operated in liquid markets.

Suggested Citation

Yadlin, Omri, Is Stock Manipulation Bad? Questioning the Conventional Wisdom with Evidence from the Israeli Experience. Available at SSRN: https://ssrn.com/abstract=236498

Omri Yadlin (Contact Author)

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv, 69978
Israel

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,002
PlumX Metrics