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Asset prices’ responses to public information manipulation: The role of market feedback

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  • Liu, Xiao
  • Wang, Ziyu
  • Zhu, Minxing

Abstract

How does information transmission from financial markets to the real economy affect asset prices’ reaction to manipulated news? We examine this question in a model in which a firm manipulates public information about its productivity, investors trade a financial asset whose payoff is contingent on the firm’s value, and a capital provider decides the capital input to the firm. We analytically demonstrate that the capital provider’s learning from the asset price (i.e., the feedback effect) lowers informed investors’ perceived asset payoff risk, facilitates informed trading, increases price informativeness, and mitigates the asset price’s response to the firm’s manipulation. Consequently, the feedback effect reduces the intensity of financial reporting fraud.

Suggested Citation

  • Liu, Xiao & Wang, Ziyu & Zhu, Minxing, 2024. "Asset prices’ responses to public information manipulation: The role of market feedback," Economics Letters, Elsevier, vol. 239(C).
    • Handle: RePEc:eee:ecolet:v:239:y:2024:i:c:s0165176524002179
    DOI: 10.1016/j.econlet.2024.111734
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    More about this item

    Keywords

    Disclosure; Feedback effect; Information manipulation; Limited attention; Price informativeness;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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