Author Abstract
Firms can manipulate their stock price by restricting the tradable float. When risk averse investors have differences of opinion and are short-sale constrained, reductions in the float freeze out pessimistic investors, pushing up prices. When the float is released, prices fall. To formally test this idea, I examine a series of corporate events in Japan in which firms actively reduced their float between 0.1 and 99.9 percent for periods of one to three months. Consistent with the theory, (a) prices rise when the float is contracted and fall when the float is released, and (b) returns are cross-sectionally related to the reduction in float. Firms are more likely to issue equity or redeem convertible debt during the period when float is low, suggesting strong incentives for manipulation. More generally, the results may explain why several pricing anomalies are associated with low float.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: June 2005, revised February 2006
- HBS Working Paper Number: 05-079
- Faculty Unit(s): Finance
