Abstract
This study examines the manipulation of stock prices in Taiwan stock markets. Using a new set of hand-collected data, we examine the characteristics and patterns of manipulated stocks and their effects on the market. Our results show that manipulated firms tend to be small and to have poor corporate governance. Most manipulation cases involve a “pump-and-dump” trading strategy and stabilization operations. Pump-and-dump manipulations lead to high temporary price impacts, increased volatility, large trading volumes, short-term price continuation, and long-term price reversals during the manipulation period. They therefore have an important impact on market efficiency. In stabilization cases, the manipulation has no impact on market performance, except that the price drop and abnormal returns of the post-manipulation period are significantly lower than during the pre-manipulation period. Firm fundamentals are important in deciding the price impacts of stock manipulation. Compared with manipulated firms with positive fundamentals, the manipulation of firms with negative fundamentals has a more detrimental effect on market efficiency.
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Notes
Article 155-5 prohibits the following:
To effect either alone or with more other persons any series of transactions for the purchase and/or sale of any security without the permission of government rules or regulations for the purpose of pegging, fixing, or stabilizing the price on said securities traded on the security exchange.
Overall, of the 118 prosecuted cases in our study, 77 % were judged guilty in the first sentence.
The LAWBANK database contains information about all the laws, regulations, and civil and criminal cases brought forward by the Judicial Yuan of Taiwan, from 1911 to the present.
Stabilization is a form of manipulation with the intent of pegging, fixing, or stabilizing the price on any security traded on the security exchange. Such manipulations are usually carried out by corporate insiders.
The TEJ database is the largest financial database in Taiwan. It contains complete financial and market data for all securities traded on the TWSE and OTC in Taiwan.
Manipulation cases are announced only after prosecution, which is usually 2 or 3 years after the manipulation period and therefore does not overlap with this study’s post-manipulation period.
We also conduct an analysis that eliminates the four information-based manipulation cases; the results, not shown here for brevity, are similar to those for the original sample. The results are available upon request.
We also calculate the Garman–Klass (1980) volatility measure and produce qualitatively similar results.
Because the average manipulation period is 92 days, we choose 100 days to measure temporary price impacts for comparison. In addition, Fig. 1 shows that it takes nearly 100 days for the market to absorb a manipulation event.
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Huang, Y.C., Cheng, Y.J. Stock manipulation and its effects: pump and dump versus stabilization. Rev Quant Finan Acc 44, 791–815 (2015). https://doi.org/10.1007/s11156-013-0419-z
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DOI: https://doi.org/10.1007/s11156-013-0419-z