Stock Market Manipulation - Theory and Evidence

49 Pages Posted: 8 Dec 2003

See all articles by Rajesh K. Aggarwal

Rajesh K. Aggarwal

Northeastern University

Guojun Wu

University of Houston; China Academy of Financial Research (CAFR)

Date Written: March 11, 2003


In this paper we present a theory and some empirical evidence on stock price manipulation in the United States. Extending the framework of Allen and Gale (1992), we consider what happens when a manipulator can trade in the presence of other traders who seek out information about the stock's true value. In a market without manipulators, these information seekers unambiguously improve market efficiency by pushing prices up to the level indicated by the informed party's information. In a market with manipulators, the information seekers play a more ambiguous role. More information seekers imply greater competition for shares, making it easier for a manipulator to enter the market and potentially worsening market efficiency. This suggests a strong role for government regulation to discourage manipulation while encouraging greater competition for information. Using a unique dataset, we then provide evidence from SEC actions in cases of stock manipulation. We find that potentially informed parties such as corporate insiders, brokers, underwriters, large shareholders and market makers are likely to be manipulators. More illiquid stocks are more likely to be manipulated and manipulation increases stock volatility. We show that stock prices rise throughout the manipulation period and then fall in the postmanipulation period. Prices and liquidity are higher when the manipulator sells than when the manipulator buys. In addition, at the time the manipulator sells, prices are higher when liquidity is greater and when volatility is greater. These results are consistent with the model and suggest that stock market manipulation may have important impacts on market efficiency.

Suggested Citation

Aggarwal, Rajesh K. and Wu, Guojun, Stock Market Manipulation - Theory and Evidence (March 11, 2003). AFA 2004 San Diego Meetings, Available at SSRN: or

Rajesh K. Aggarwal (Contact Author)

Northeastern University ( email )

413 Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States

Guojun Wu

University of Houston ( email )

220F Melcher Hall
Houston, TX 77204-6021
United States
713-743-4813 (Phone)
713-743-4789 (Fax)


China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030

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