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

76 Pages Posted: 16 Dec 2018 Last revised: 26 Jul 2021

See all articles by Christian Leuz

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; 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: June 24, 2021

Abstract

Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and 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, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted stocks than demographics. Our analysis offers insights into the challenges associated with designing effective investor protection against market manipulation.

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

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 (June 24, 2021). Center for Financial Studies Working Paper No. 609, Available at SSRN: https://ssrn.com/abstract=3289931 or http://dx.doi.org/10.2139/ssrn.3289931

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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HOME PAGE: http://www.nber.org

European Corporate Governance Institute (ECGI)

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Belgium

HOME PAGE: http://www.ecgi.org

Center for Financial Studies (CFS) ( email )

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University of Pennsylvania - Wharton Financial Institutions Center

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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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