Stock price manipulation, short-sale constraints, and breadth-return relationship

• Published in: Pacific-Basin finance journal 2021-06, Vol.67, p.101556, Article 101556
• Main Authors: Cao, Zhiqi, Lv, Dayong, Sun, Zhenzhen
• Format: Article
• Language: English
• Subjects: Breadth-return relationship; China; Manipulation; Ownership breadth; Short-sale constraints
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/j.pacfin.2021.101556

We examine the breadth-return relationship and the effect of stock price manipulation on it. Using data from the Chinese stock market, we first empirically find a significantly negative breadth-return relationship. Moreover, we conduct a long-short trading strategy based on breadth change, and show that the magnitude of long-short hedged portfolio based on easily-manipulated stocks is at least 46% more than that based on difficultly-manipulated stocks, suggesting that the negative breadth-return relationship is more pronounced for stocks that are easier to be manipulated. Different from the popularity view of Choi et al. (2013), our results support the “manipulation view” that manipulation behaviors of large investors drive the negative breadth-return relationship. Furthermore, the negative breadth-return relationship is alleviated after relaxing short-sale constraints, indicating that the short-sale mechanism can help reduce stock price manipulation. This paper sheds new light on the role of ownership breadth. •Ownership breadth change is negatively related to future returns and reflects stock price manipulation.•Decrease in ownership breadth is associated with the process of manipulators' pooling shares and increase in ownership breadth is associated with the process of manipulators' selling shares.•The negative breadth-return relationship is more pronounced for stocks that are easier to be manipulated.•The negative breadth-return relationship is alleviated after short-sale constraints are relaxed.