Market Manipulation and Innovation

Event abstract

End-of-day price manipulation is associated with short-termism of the firm’s orientation, long-term harm to a firm’s equity values, and commensurate with reduced incentives for employees to innovate. Insider trading, by contrast, enables innovators to achieve exacerbated profits from innovation. Using a sample of suspected manipulation events for all stocks from nine countries over the years 2003-2010, we find evidence consistent with these real impacts of market manipulation on innovation. These findings are not attributable to “bad” firms innovating less and manipulating more, since the average firm subjected to manipulation in the sample is more innovative during the pre-manipulation period.