Closing Price Manipulation

2124 Words9 Pages
The primary goal of this paper is to assess the impact of microcap stock promotion campaigns on stock volume and price. This study uses a sample of 81 stock touting emails sent by promotion companies to potential investors in 2009. Each promotion is matched with its corresponding touted stock, and the daily volumes and prices for each stock are analyzed for a period following the promotion. Using this empirical data, this research shows a significant (and in many cases drastic) increase in both stock volumes and prices on the day of and days following a promotion. In the long term however, volumes returns to normal (pre-promotion volume), and prices decrease to levels lower than their pre-promotion prices. The evidence is presented under the section labeled “Findings”. In-depth explanation on how the study is conducted as well as additional information related to the data can be found in the section “Data Description/Method”. This paper also details the microcap stock promotion industry and explains the economics behind the business. Included is information on who hires the promotion companies and their reasons for doing so, the operations and profitability of the promotion companies, the frequency of stock touting cases, the manipulation methods involved, and the risks of prosecution by the Securities and Exchange Commission (SEC). Background Promotion Companies Each year hundreds of publicly trading companies, either directly or indirectly through large shareholders, hire stock promotion companies (or investment newsletters as many refer to themselves as) to “promote” or “tout” their stocks. The promotion companies’ job is to attract unsuspecting and naive investors to purchase the promoted stocks. This allows the hir... ... middle of paper ... ...doesn’t work out “as planned”. They act as if their stock touts come from the goodness of their hearts. Other schemes employed by promoters (and the promoters’ hirers) include closing price manipulation, wash trading, and message board spamming The illegal practice of closing price manipulation (also known as “painting the tape”) is a way for promoters to push a stock’s closing price to an artificially higher level. Promoters might use this tactic to make a certain stock “green” for the day (close at higher price than the previous day’s close), when in reality it should have appeared negative for the day (close lower than the previous day’s close), thus making the stock more attractive to investors. It is important for promoters to present a certain image of a stock to investors—often that means manipulating prices in a way that appeals to an investor’s psyche.
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