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Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation

Christian Leuz, Steffen Meyer, Maximilian Muhn, Eugene Soltes and Andreas Hackethal

No 24083, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted stocks than demographics. Our analysis offers insights into the challenges associated with designing effective investor protection against market manipulation.

JEL-codes: D14 D18 G11 G14 G18 G28 G41 K22 K42 M48 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-law
Date: 2017-11
Note: AP CF LE
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