The Real Effects of Market Manipulation

Abstract

Market manipulation distorts financial market prices, but does it have real economic effects on listed companies? We show that it does. Increased manipulation makes stock price signals less useful for firm managers seeking to learn about potential investment opportunities, thereby decreasing the sensitivity of firms' investments to stock prices. This leads to a decline in the quality of firms' investment decisions, and consequently, firm operating performance also decreases. Our findings suggest that the real economic consequences of market manipulation extend beyond the direct effects on secondary markets.

Keywords: Market manipulation, investment-to-price sensitivity, real effects of market manipulation

JEL Classification: G14, G31, G12