Stock Price Manipulation, Short-sale Constraints, and Breadth-return Relationship
57 Pages Posted: 22 Apr 2021 Last revised: 23 Apr 2021
Date Written: April 8, 2021
We examine the breadth-return relationship and the effect of stock price manipulation on it. Using data from the Chinese stock market, we first empirically find a significantly negative breadth-return relationship. Moreover, we conduct a long-short trading strategy based on the breadth change, and show that the magnitude of long-short hedged portfolio based on easily-manipulated stocks is at least 46% more than that based on difficultly-manipulated stocks, suggesting that the negative breadth-return relationship is more pronounced for stocks that are easier to be manipulated. Different from the popularity view of Choi, Jin, and Yan (2013), our results support the “manipulation view” that manipulation behaviors of large investors drive the negative breadth-return relationship. Furthermore, the negative breadth-return relationship is alleviated after relaxing short-sale constraints, indicating that the short-sale mechanism can help reduce stock price manipulation. This paper sheds new light on the role of ownership breadth.
Keywords: ownership breadth; manipulation; short-sale constraints; breadth-return relationship; China
JEL Classification: G14; G23
Suggested Citation: Suggested Citation