Stock Market Manipulation and Corporate Venture Capital Investments

Abstract

We propose that stock price manipulation erodes trust, damages corporate reputation, reorients management towards short-termism, harms entrepreneurial innovation culture, and increases the cost of capital. We test these ideas by linking stock manipulation data to corporate venture capital data for firms listed on the NASDAQ and NYSE. The data indicate CVC investments in entrepreneurial firms are followed by a rise in market manipulation in the short run [-3 months, +3 months], but a decline thereafter. The data further indicates that stock manipulation harms the ability of CVCs to form investment syndicates and reduces the likelihood of successful IPO and acquisition exits. The hazard rate to IPO is 0.54 for CVC-backed firms that face market manipulation. Overall, the theory and evidence provide insights into how firm's stock manipulation can damage the effectiveness of their venture capital endeavors, ultimately contributing to sustainable growth and innovation.

Keywords: Market microstructure, Market manipulation, Corporate Venture capital, Syndication, IPO Exit JEL Codes: G14, G24

JEL Classification: G14, G24