Found this today posted on Stockhouse the Canadian equivalent of Hot Copper.
An excerpt from 'Bear Raid' Stock Manipulation: How and When It Works, and Who Benefits"
...Wharton finance professor Itay Goldstein.and Alexander Guembel of the Saïd Business School and Lincoln College at the University of Oxford describe the procedure in their paper titled, "Manipulation and the Allocational Role of Prices."
Their key finding illuminates the interplay between a firm's real economic value and its stock price, showing how traders who deliberately drive the share price down can undermine the firm's health, causing the share price to fall further in a vicious cycle.
"What we show here is that by selling [the stock], you have a real effect on the firm," Goldstein notes.
"The connection with real value is the new thing.... That is the crucial element."
Goldstein and Guembel find that the process only works when the intent is to damage the firm; traders do not have the same power to create a feedback loop that drives the share price up.
The key to the process is the short sale, when a trader borrows shares from a broker, sells them and hopes to repay the loan with shares bought later for less. The short seller profits only if the stock price falls -- selling high and then buying low. If the price goes up, he has to buy replacement shares for more than he made on the ones he sold.
Ganging up on the Share Price
The connection between a firm's share price and its true value is not as tight as many people assume.
Companies sell stock to the public to raise money. Once the shares are in circulation, the price tends to
rise and fall to reflect the ups and downs of the firm's earnings, but other forces are at play as well – the overall trend in the market or industry, the firm's performance relative to its industry peers, and speculation about how the firm's business strategy, products and competitiveness will affect future earnings.
At times, enthusiastic investors may push the share price up even though there is no hard evidence the earnings will grow. At other times, investor sentiment can turn negative, driving the share price down even though the firm appears perfectly healthy.
Because the relationship between a firm's business performance and stock price can be so loose, it has long been felt that the fate of the stock does not necessarily have any direct impact on a firm's real economic value, measured by things like assets and earnings.
Clearly, speculators can gang up to drive the share price down with a rush of short sales, but at some point other traders -- impressed by the company's health -- would see the shares as a bargain and higher demand would cause the share price to stabilize and rise. A bear raid would therefore have no lasting effect. But if the falling share price caused by a bear raid does real economic damage to the firm, other investors are likely to dump the stock as well, causing a vicious cycle of falling share prices and economic damage that would make the bear raid more profitable....
