Stock Price Manipulation: The Role of Intermediaries

Abstract

Abstract:We model a scenario in which there are three types of investors: fundamentalists, speculators, and trend-followers and an intermediary who cares about his reputation. Fundamentalists are rational investors with long horizons who are interested in the dividend stream. Speculators are rational investors who have short horizons and are interested in profiting from short-term price movements or capital gains. Trend-followers are behavioral investors who extrapolate price trends, and, consequently, are late entrants in the market. We show that an informed intermediary (broker) can manipulate demand (consequently stock price) without losing his reputation when there is information asymmetry. We also show that there is a trade-off between broker level competition for reputation and market liquidity. Broker level competition checks manipulation, but it adversely affects market liquidity.

Persistence of Activist Short-Sellers' Performance: The Effect of Past Success.

“…In this respect, our paper also contributes more broadly to the literature on market manipulation (Benabou and Laroque 1992;Putnins 2012;Siddiqi 2017;Hackethal et al 2019) and social media. It has been suggested that investors should be allowed to act as intermediaries for each other, resulting in financial analyses (such as campaign reports by activist short sellers) provided freely to "democratize investment research" (Farrell et al 2018;Gomez et al 2018).…”