Abstract

This paper theoretically discusses why and how a large shareholder adopts a manipulation strategy. In the spirit of Glosten and Milgrom (1985) and Easley and O’Hara (1987), our model considers a market with a potential raider who is able to alter (say increase) the fundamental value of a firm by paying some costs. The results suggest that when the large shareholder privately knows the existence of the raider, he will probably manipulate the stock price lower in order to attract the raider buying the shares of the firm and to intervene. In particular, the large shareholder is going to manipulate the stock price in the situation when the benefit of the raider’s intervention is moderate and the shareholder possesses sufficiently many shares of the stocks. Although the manipulative strategy may result in trading losses, the intervention of the raider increases the shareholder’s total wealth.

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