Price Informativeness and Corporate Investment: A Model of Costly Manipulation and Share Repurchases

66 Pages Posted: 29 Sep 2020 Last revised: 23 Dec 2023

See all articles by Murillo Campello

Murillo Campello

University of Florida - Warrington College of Business Administration; National Bureau of Economic Research (NBER)

Rafael Matta

SKEMA Business School - Université Côte d'Azur

Pedro Saffi

University of Cambridge - Judge Business School

Date Written: September 09, 2024

Abstract

We characterize how managers can curb manipulation by signaling information via stock repurchases in an environment with costly short selling and feedback effects from trading to firms' access to capital. Without repurchases, manipulation coexists with informed trading at low shorting costs, reducing price informativeness and firm investment. Manipulation becomes less profitable as shorting costs increase, making prices more informative and boosting investment if speculators are less informed. Incentives to manipulate cease to exist at moderate short selling costs, but making shorting more costly reduces price informativeness and firm investment. Our model shows how contracts that pre-commit funding and condition future investment on stock prices can induce managers to eliminate manipulation through stock repurchases, facilitating optimal investment policies. An important policy implication is that when stock repurchases are allowed and shorting costs are low, short selling bans will typically reduce investment efficiency

Keywords: Short selling costs, stock manipulation, informed trading, corporate investment, share repurchases

JEL Classification: D82, D84, G14, G32

Suggested Citation

Campello, Murillo and Matta, Rafael and Saffi, Pedro A. C., Price Informativeness and Corporate Investment: A Model of Costly Manipulation and Share Repurchases (September 09, 2024). Available at SSRN: https://ssrn.com/abstract=3669172 or http://dx.doi.org/10.2139/ssrn.3669172

Murillo Campello

University of Florida - Warrington College of Business Administration ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Rafael Matta

SKEMA Business School - Université Côte d'Azur ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

HOME PAGE: http://https://sites.google.com/site/almeidadamatta/

Pedro A. C. Saffi (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

HOME PAGE: http://www.pedrosaffi.com

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