Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation

80 Pages Posted: 29 Nov 2017 Last revised: 25 Apr 2022

See all articles by Christian Leuz

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Leibniz Institute SAFE; European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); CESifo Research Network

Steffen Meyer

University of Southern Denmark - Department of Business and Economics; Danish Finance Institute

Maximilian Muhn

University of Chicago - Booth School of Business

Eugene F. Soltes

Harvard University - Business School (HBS)

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE

Multiple version iconThere are 3 versions of this paper

Date Written: April 22, 2022

Abstract

Price distortions created by so-called “pump-and-dump” schemes are well known, but relatively little is known about the investors in these frauds. By examining 470 “pump-and-dump” schemes using a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, the losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common with nearly 8% of active investors participating in at least one “pump-and-dump” losing on average nearly 30%. We identify several distinct types among participating investors, some of which (i.e., day trader) should not be viewed as falling prey to the schemes. We show that investor types respond differently to market manipulation, which poses challenges in designing investor protections. We also show that portfolio composition and past trading behavior better explain tout participation than demographics. Moreover, the immediate effects of the schemes are only part of their adverse impact. We identify broader and longer lasting ramifications for participating investors beyond their direct financial losses.

Keywords: Market manipulation, Pump-and-dump schemes, Securities regulation, Fraud, Investor protection, Lottery stocks, Household finance, Penny Stocks

JEL Classification: D14, G11, G18, K42, M48

Suggested Citation

Leuz, Christian and Meyer, Steffen and Muhn, Maximilian and Soltes, Eugene F. and Hackethal, Andreas, Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation (April 22, 2022). European Corporate Governance Institute (ECGI) - Law Working Paper No. 446/2019, Available at SSRN: https://ssrn.com/abstract=3073817 or http://dx.doi.org/10.2139/ssrn.3073817

Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Leibniz Institute SAFE ( email )

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European Corporate Governance Institute (ECGI)

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Belgium

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Center for Financial Studies (CFS) ( email )

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Germany

CESifo Research Network

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Steffen Meyer

University of Southern Denmark - Department of Business and Economics ( email )

DK-5230 Odense
Denmark

Danish Finance Institute ( email )

Maximilian Muhn

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Eugene F. Soltes

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno Platz 3
Frankfurt am Main, 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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