A Research On Stock Price Manipulation In China

The Chinese stock market has been expanding enormously since Shanghai stock exchange market was established in 1990. Like other countries, the stock price manipulation was one of the main problems which has bothered the development of Chinese stock market. Stock price manipulation means that the manipulator violates security law and regulations, and makes use of his advantages in funds, information, share holdings or even his power to influence the stock's normal price, or to create the exchange illusions which induce purchasers to make false investment decision without knowing the truth so that gain the extra or illegal return.As a crucial part of micro-finance structure, the manipulation of stock price is closely related to the theory of Information Economics, Behavior Finance etc. This paper is not only valuable in theory but also helpful for supervisors and investors to understand the essence and characters of stock price manipulation so that they could supervise or prevent stock price manipulation efficiently.Based on the behavioral finance theory and achievements both domestically and internationally, this paper establishes the Chinese stock pricing model and the behavioral biases model of Chinese stock price manipulation. Under the exchange mechanism of order-driven system in China, the stock price is determined by its real value and demand-supply situation. When the real value of the stock does not change, the price will be influenced by the imbalance of demand-supply significantly. Therefore, the manipulator becomes as price-maker of the market just by controlling the demand-supply situation .The behavioral biases model of stock price manipulation explains the theoretical possibility of the stock price manipulation in Chinese stock market, that is the manipulator will be able to gain manipulation profits by utilizing the normal investors' behavioral biases including representative bias and disposition effect. Moreover, the manipulator could transfer parts of his manipulation costs to the normal investors because of their representative bias.However, this is only a possibility. In order to find out whether the stock market satisfy those conditions and how the possibility come to be truth , we then analyze the real conditions of this behavior in Chinese stock market. Now we can draw the conclusion that the problems existing in Chinese stock market, such as the investor's behavioral biases, corporate governance failure, lacking of government supervision and existing of non-tradable-shares, not only make the stock price manipulation possible in China, but also make it even much easier and more serious than in other countries.Firstly, an empirical analysis is made on 22 manipulation cases which are collected and organized from authorities from 1990 to 2003. Then this paper summarizes the features among current stock price manipulation cases :(1) most of the manipulators are institutional investors;(2) manipulator is closely linked with listed companies; (3) most manipulations are trade-based and sometimes are combined with insider trading;(4) the commonly used methods of the manipulation are wash sales and continuous sales;(5) high degree of manipulation;(6) manipulator controls decisive shareholdings;(7) manipulator normally make use of several personal accounts.Secondly, the paper tests some conclusions of the theory model using the real manipulation cases. One conclusion that partly disposition effect of the behavioral-biases investors will make the manipulator sell less and less stock shares in the selling period has been tested, and the other conclusion that the representative bias of the investors will make the manipulator buy less and less shares in the price raising period and transfer part of his manipulation costs to the investors has been tested, too. For the intuitionistic understanding, I use the YiAn science and technology manipulation case as an example. Thirdly, I analyze the changes of return rate, volatility and turnover rate in the course of manipulation. The following results show that the stock has a higher return and volatility in the manipulation period and a return reverses after the manipulation for a long time. This is further proved that the more return is apparently generated by price manipulation rather than the corporation real value through the dumb variable analysis. And it is also shown that share with poor liquidity or a smaller scale is more likely to become manipulators' target.In the end, after analyzing the game between stock price manipulation and supervision, I design the supervising system. And I also set up an indicator system to inspect the stock market, which includes return rate, volatility, share concentration, and liquidity. In the last part of the paper, for preventing stock price manipulation, I give some suggestions on how to educate the investors, how to expand and regulate the institutional investors, how to strengthen the management on the listed companies, how to improve the supervision system and how to construct the legal system.