Does Stock Manipulation Distort Corporate Investment? The Role of Short Selling Costs and Share Repurchases

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See all articles by Murillo Campello

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Rafael Matta

SKEMA Business School - Université Côte d'Azur

Pedro A. C. Saffi

University of Cambridge - Judge Business School

Date Written: August 7, 2020

Abstract

We characterize the effect of short selling costs on interactions between informed and uninformed speculators, showing how this dynamic impacts corporate decisions such as investment and stock repurchases. Low shorting costs allow for manipulation to coexist with informed trading, reducing price informativeness and investment. Manipulation becomes less profitable as shorting costs increase, making prices more informative and boosting investment when speculators are less likely to be informed. At high shorting costs, informed shorting is unprofitable even in the absence of manipulation threats, resulting in low price informativeness and constraining firms' access to financing. Our model shows that the ability to pre-commit funds before prices reflect speculators' information yields a negative relation between investment and shorting costs. Critically, it demonstrates how managers can stop manipulative shorts through stock repurchases, leading to efficient investment. Stock liquidity, cash flow uncertainty, and management--creditor agency problems are shown to shape the impact of short selling costs on corporate policies.

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

JEL Classification: G23, G32, G35

Suggested Citation

Campello, Murillo and Matta, Rafael and Saffi, Pedro A. C., Does Stock Manipulation Distort Corporate Investment? The Role of Short Selling Costs and Share Repurchases (August 7, 2020). Available at SSRN: https://ssrn.com/abstract=

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

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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