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Do Hedge Funds Manipulate Stock Prices?

  • Ben-David, Itzhak

    (OH State University)

  • Franzoni, Francesco

    (Swiss Finance Institute and University of Ligano)

  • Landier, Augustin

    (Toulouse School of Economics)

  • Moussawi, Rabih

    (University of PA)

We find evidence of significant price manipulation at the stock level by hedge funds on critical reporting dates. Stocks in the top quartile by hedge fund holdings exhibit abnormal returns of 30 basis points in the last day of the month and a reversal of 25 basis points in the following day. Using intraday data, we show that a significant part of the return is earned during the last minutes of the last day of the month, at an increasing rate towards the closing bell. This evidence is consistent with hedge funds' incentive to inflate their monthly performance by buying stocks that they hold in their portfolios. Higher manipulations occur with funds that have higher incentives to improve their ranking relative to their peers and a lower cost of doing so.

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File URL: http://fisher.osu.edu/supplements/10/10471/2011-5.pdf
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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2011-5.

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Date of creation: Feb 2011
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Handle: RePEc:ecl:ohidic:2011-5
Contact details of provider: Phone: (614) 292-8449
Web page: http://www.cob.ohio-state.edu/fin/dice/list.htm
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