Stock Price Manipulation (Reprint 025)

Franklin Allen and Douglas Gale ()

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: Prior to the Securities Exchange Act of 1934, manipulation of stock prices was an issue of great concern. The Act reduced the possibilities for manipulation by, among other things, making it illegal for a manager to sell short his firm’s shares or for false information about a firm to be released. This paper asks whether an uninformed raider can profitably manipulate stock prices simply by buying and selling shares. It is shown that in a rational expectations framework where all agents maximize utility, it is possible for an uninformed raider to manipulate stock prices profitably, provided investors attach a positive probability to the raider being informed.

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