Float Manipulation and Stock Prices

Robin Greenwood

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.

Executive Summary:

When a firm reduces the number of shares available to trade, so-called float manipulation, the price of the stock is often driven up. The author uses a series of 2,000 stock split events in Japan as an experiment to understand the consequences of float manipulation for stock prices. The conclusion: Stock prices are raised significantly when there are differing opinions about the value of shares, investors are unable to sell short, and the number of outstanding shares is reduced. Key concepts include:

• Firms may use a float reduction as an opportunity to raise equity, or managers may exploit it as an opportunity to sell overpriced shares.

 

Robin Greenwood is an assistant professor in the Finance unit at Harvard Business School.