Market manipulation has been less thoroughly examined in the academic literature but is a growing concern on many emerging stock markets. The possibility that the markets can be manipulated is an important issue for both the regulation of trading and the efficiency of the market. Security regulators generally prohibit market manipulations on the basis that they distort prices, hamper price discovery, and create deadweight losses. In particular, many Asian stock markets have securities that are thinly traded and therefore more susceptible to manipulation.
In modern financial markets, manipulations are often taken in hidden ways that cannot be easily detected and outlawed. While manipulative activities seem to have declined on the main exchanges, it is still a serious issue in the over-the-counter (OTC) market in the U.S. and in emerging financial markets. In particular, in many emerging markets where legal enforcement is weak, manipulation is still rampant. Recent studies, such as Khwaja and Mian (2005) and Wu (2004), suggest that manipulation could still be quite prevalent in emerging markets. Even in the relatively well-regulated U.S., Aggarwal and Wu (2004) have documented more than 100 cases of price manipulation in the 1990s.
Although several theories on stock market manipulation have been investigated, empirical evidence about stock manipulation is still scarce. Moreover, most of the empirical evidence on manipulation has focused on well-developed countries such as U.S. Research on emerging markets is scarce. As we are aware, there is a wide disparity in disclosure requirements and securities regulations across nations. The disclosure requirements in USA are considered high relative to the rest of the world, while disclosure requirements and securities regulations in emerging markets are less stringent.
In this paper, we undertake an examination using a set of unique data to study the characteristics of manipulated stocks and the impacts they have on market quality. The samples establish some basic facts about stock market manipulation in an emerging market, Taiwan. We have hand-collected data on manipulation cases pursued by Taiwan Securities and Exchange Commission from 1991 to 2005. Surprisingly few studies have so far been made at empirical investigation of emerging financial market manipulation using a prosecuting sample of cases. The findings will provide useful knowledge for regulatory policy as well as the investigation of manipulation cases.
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Stock manipulation and its impact on market quality
