In Data We Trust: Proving Market Manipulation on the Tehran Stock Exchange

Abstract

The Iranian financial markets play an essential role in the country's economic development. In 2019 and 2020, ordinary traders were encouraged by the political authorities to invest in state-owned enterprises. Citizens who invested in Tehran Stock Exchange (TSE) indices routinely complain that the volatile market performance has wiped out their capital and savings. In this study, the reliability of intraday transaction data for 341 stocks listed on the TSE was examined. Our critical objective is to identify fraud on the TSE. The authors applied Benford's first and second digit laws to detect irregularities in financial data based on three goodness of fit tests. The authors found overwhelming evidence of the presence of market manipulation on the TSE. We found that 46 percent of the companies listed on the TSE did not adhere to the law of the first digit. A thorough analysis of compliance with the second digit revealed a similar pattern. Given the severe impact of trade restrictions imposed by the 2018 US sanctions and the substantial increase in Iran's public debt burden, the TSE has become a major source for offsetting the government's deficit by conducting IPOs of state-owned companies. Market manipulation in Iran appears to be motivated by the government's urgent need for fresh capital and its waste. It would be a common misconception to trust the TSE's data.