Does Stock Manipulation Distort Corporate Investment? The Role of Short Selling Costs and Share Repurchases

63 Pages Posted: 29 Sep 2020 Last revised: 25 Nov 2020

See all articles by Murillo Campello

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Rafael Matta

SKEMA Business School - Université Côte d'Azur

Pedro A. C. Saffi

University of Cambridge - Judge Business School

Date Written: August 7, 2020

Abstract

We characterize the effect of short selling costs on interactions between informed and uninformed speculators, showing how this dynamic impacts corporate decisions. Manipulation coexists with informed trading at low shorting costs, reducing price informativeness and firm investment. Manipulation becomes less profitable as shorting costs increase, making prices more informative and boosting investment if speculators are less likely to be informed. At high shorting costs, informed shorting is unprofitable even without manipulation threats, resulting in low price informativeness and constraining firm investment. Our model shows how contracts that pre-commit funds induce managers to stop manipulation through stock repurchases, implementing efficient investment.

Keywords: Short selling costs, stock manipulation, informed trading, corporate investment, share repurchases

JEL Classification: D82, D84, G14, G32

Suggested Citation

Campello, Murillo and Matta, Rafael and Saffi, Pedro A. C., Does Stock Manipulation Distort Corporate Investment? The Role of Short Selling Costs and Share Repurchases (August 7, 2020). Available at SSRN: https://ssrn.com/abstract=3669172 or http://dx.doi.org/10.2139/ssrn.3669172

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Rafael Matta

SKEMA Business School - Université Côte d'Azur ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

HOME PAGE: http://https://sites.google.com/site/almeidadamatta/

Pedro A. C. Saffi (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

HOME PAGE: http://www.pedrosaffi.com

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