Market Manipulation and Innovation

Abstract End-of-day price manipulation is associated short-termism of the firm’s orientation, long-term harm to a firm’s equity values, and commensurate reduced incentives for employees to innovate. Insider trading, by contrast, enables innovators to achieve exacerbated profits from innovation. Based on a comprehensive sample of all trading days and suspected end-of-day and insider trading events for all stocks from proprietary surveillance data from 9 countries over the years 2003-2010, we find evidence consistent with these real impacts of market manipulation on innovation.