Stock Price Manipulation, Short-sale Constraints, and Breadth-return Relationship

57 Pages Posted: 22 Apr 2021 Last revised: 23 Apr 2021

See all articles by Zhiqi Cao

Zhiqi Cao

Shanghai Jiao Tong University (SJTU)

Dayong Lv

Shanghai Lixin Univeristy of Accounting and Finance

Zhenzhen Sun

University of Massachusetts Dartmouth; University of Massachusetts Dartmouth

Date Written: April 8, 2021

Abstract

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

Cao, Zhiqi and Lv, Dayong and Sun, Zhenzhen, Stock Price Manipulation, Short-sale Constraints, and Breadth-return Relationship (April 8, 2021). Pacific-Basin Finance Journal, Forthcoming, https://doi.org/10.1016/j.pacfin.2021.101556, Available at SSRN: https://ssrn.com/abstract=3831630

Zhiqi Cao

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

Dayong Lv (Contact Author)

Shanghai Lixin Univeristy of Accounting and Finance ( email )

Shanghai
China

Zhenzhen Sun

University of Massachusetts Dartmouth ( email )

285 Old Westport Road
Dartmouth, MA 02747-2300
United States

University of Massachusetts Dartmouth ( email )

285 Old Westport Road
N Dartmouth, MA 02747-2300
United States

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