Publication Type

Working Paper

Publication Date



We identify a setting in which there is a predictable incentive for short sellers to manipulate prices, and we find patterns consistent with short sellers manipulating prices. Specifically, we find that stocks with high short interest experience abnormally low returns on the last trading day of the year. This effect is strongest among stocks that are easily manipulated and during the last hour of trading. Further, this effect reverses at the beginning of the year, consistent with the temporary nature of price manipulation. We show that hedge funds’ portfolios are closely related to market-wide short interest, suggesting that hedge funds, with their convex compensation structures, may generate the patterns we observe. In additional analysis, we find that larger price effects are associated with higher idiosyncratic volatility, offering a potential explanation for why temporary price effects are allowed to persist in the presence of rational arbitrageurs, but we find no evidence to suggest that extended non-trading-day holding periods play a role in the magnitude of the effects. Finally, we provide evidence of mutual funds and short sellers avoiding each other, and we show that downward pressure by short sellers is outweighed by upward pressure by buyers. In other words, since short sellers’ incentives are mirrored by buyers’ incentives in the opposite direction, our experiment provides evidence that short sellers manipulate prices in much the same way buyers do, and manipulation by short sellers is no stronger than manipulation by buyers.


Short sellers, price manipulation, hedge funds


Finance and Financial Management

First Page



The research was partially funded by BNPP Hedge Fund Centre at Singapore Management Centre. Copy made available with permission of the authors.