Stock Price Manipulation: Corporate Actions and the Exploitation of Retail Investors in China

Abstract

Using account level data from the Shanghai Stock Exchange, we find widespread evidence consistent with insiders manipulating share prices to exploit naïve retail investors. We identify a group of “suspicious” firms that use stock splits—perhaps, along with other misleading activities—to artificially inflate their share prices. Retail investors are strongly attracted to these suspicious splits, providing insiders an opportunity to sell large blocks of shares or use their shares as collateral for loans. A group of large accounts exploits the positive feedback trading behavior of naïve retail investors by accumulating positions before suspicious split announcements and selling in the post-split period.

Keywords: stock market manipulation, stock splits, China

JEL Classification: G14