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Public information manipulation in the financial market

Author

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  • Wang, Bo
  • Zheng, Suli

Abstract

Which factor might shape investor’s sentiment in the financial market? We answer this question by introducing information manipulation into the micro-structure of a financial market. In our model, an insider inflates the fundamental to boost the equilibrium market price. Because the manipulation cost is private information, the investors treat the manipulation as a noisy signal, or rather, sentiment. The manipulation turns out to be a linear combination of fundamental and manipulation cost. The equilibrium level of manipulation decreases with market supply elasticity and transparency. Overall, our theory suggests insider’s manipulation as a possible source of market sentiment.

Suggested Citation

  • Wang, Bo & Zheng, Suli, 2023. "Public information manipulation in the financial market," Finance Research Letters, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322006390
    DOI: 10.1016/j.frl.2022.103463
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    References listed on IDEAS

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    1. David López-Salido & Jeremy C. Stein & Egon Zakrajšek, 2017. "Credit-Market Sentiment and the Business Cycle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(3), pages 1373-1426.
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    3. Little, Andrew T., 2017. "Propaganda and credulity," Games and Economic Behavior, Elsevier, vol. 102(C), pages 224-232.
    4. Lin Peng & Ailsa Roell, 2008. "Manipulation and Equity-Based Compensation," American Economic Review, American Economic Association, vol. 98(2), pages 285-290, May.
    5. Chris Edmond, 2013. "Information Manipulation, Coordination, and Regime Change," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(4), pages 1422-1458.
    6. Lin Peng & Ailsa Röell, 2014. "Managerial Incentives and Stock Price Manipulation," Journal of Finance, American Finance Association, vol. 69(2), pages 487-526, April.
    7. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
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    Cited by:

    1. 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).

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    More about this item

    Keywords

    Information manipulation; Financial market; Sentiment;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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