Value creating stock manipulation: feedback effect of stock prices on firm value

Khanna, N and Sonti, R (2004) Value creating stock manipulation: feedback effect of stock prices on firm value. Journal of Financial Markets, 7 (3). pp. 237-270.

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Abstract

Higher stock prices relax a firm's budget constraint by increasing the value of its stock currency and enabling it to acquire larger targets through stock swaps. Higher prices also signal improved prospects to firm managers, potentially affecting their investment decisions and firm value. This feedback from prices to firm value complicates trading decisions of large traders, since their trades are likely to move prices. They need to condition not only on how their trades affect prices, but also on how these price changes induce further price changes through their impact on firm investments. This paper identifies equilibrium trading strategies of such traders and equilibrium price setting by a market maker. The question arises whether traders have an incentive to manipulate prices to get firms to undertake certain investments. The answer is yes, as long as traders maintain some inventory in the stock they trade. Moreover, the price manipulation turns out to be value-increasing for firms.

Affiliation: Indian School of Business
ISB Creators:
ISB CreatorsORCiD
Sonti, Rhttps://orcid.org/0000-0001-7540-4243
Item Type: Article
Additional Information: The research paper was published by the author with the affiliation of Tulane University.
Uncontrolled Keywords: Manipulation, Feedback, Herding, Stock Prices, Stock Markets
Depositing User: Mohan Dass
Date Deposited: 11 Jun 2019 10:15
Last Modified: 11 Jun 2019 10:17
URI: http://eprints.exchange.isb.edu/id/eprint/1064
Publisher URL: https://doi.org/10.1016/j.finmar.2003.11.004
Publisher OA policy: http://sherpa.ac.uk/romeo/issn/1386-4181/
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