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Do Hedge Funds Manipulate Stock Prices?

Authors

  • ITZHAK BEN-DAVID,

  • FRANCESCO FRANZONI,

  • AUGUSTIN LANDIER,

  • RABIH MOUSSAWI

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    • Ben-David is with the Fisher College of Business, The Ohio State University, and NBER; Franzoni is with the University of Lugano and the Swiss Finance Institute; Landier is with the Toulouse School of Economics; and Moussawi is with Wharton Research Data Services, The Wharton School, University of Pennsylvania. We appreciate the detailed comments of an anonymous referee and of Jennifer Conrad (Acting Editor). We also thank Alessandro Beber, Bruno Biais, Michael Halling, YeeJin Jang, Gulten Mero, Tarun Ramadorai, Matti Suominen, David Thesmar, Jason Zweig, and conference and seminar participants of the 3rd Annual Hedge Funds Conference in Paris, Catolica University in Lisbon, and the Helsinki Finance Summit for helpful comments. Ben-David acknowledges financial support from the Neil Klatskin Chair in Finance and Real Estate, and from the Dice Center at the Fisher College of Business. Landier acknowledges financial support from Scor Chair at Foundation Jean-Jacques Laffont and from the European Research Council under the European Community's Seventh Framework Programme (FP7/2007-2013) Grant Agreement no. 312503 - SolSys.


ABSTRACT

We provide evidence suggesting that some hedge funds manipulate stock prices on critical reporting dates. Stocks in the top quartile of hedge fund holdings exhibit abnormal returns of 0.30% on the last day of the quarter and a reversal of 0.25% on the following day. A significant part of the return is earned during the last minutes of trading. Analysis of intraday volume and order imbalance provides further evidence consistent with manipulation. These patterns are stronger for funds that have higher incentives to improve their ranking relative to their peers.

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