Stock Price Manipulation and the Cost of Debt

Abstract

Empirical evidence on the real effects of stock price manipulation remains scarce. We identify suspicious market manipulation in China's stock market by applying a detection model for closing‐price manipulation and by using the 2018 reform of the Shanghai Stock Exchange's closing auction mechanism as an exogenous policy shock aimed at curbing such practices. We find that stock price manipulation, which represents a short‐term and non‐fundamental market shock, significantly increases the cost of debt by hindering creditors from learning from stock prices and damaging corporate reputation. Furthermore, we find that stock price manipulation not only alters firms’ debt maturity structure by increasing the share of short‐term debt but also affects financing choices by reducing external debt financing and increasing reliance on internal financing. Our findings provide novel evidence on the feedback effects of financial market distortions on the real economy.