model. The rest of the paper is structured as follows.The next section reviews the literature of manipulation.Section 2 sets up the theoretical model.Section 3 solves the model for the “pump-and-dump”strategy and then extends the model to include the“dump and cover'”strategy. Section 4 investigates the implications of the model on several well-known asset-pricing anomalies.Section 5 provides some empirical evidence from the SEC prosecution of "pump-and-dump"manipulation cases.Section 6 concludes. 1.A Review of the Manipulation Literature Market manipulation is an issue that is almost as old as the earliest stock market.Even though market manipulation might be much more severe in the early years of financial markets, it is too early to say that manipulation is no longer of importance.In modern financial markets, manipulations are often taken in hidden ways that cannot be easily detected and outlawed.In many emerging markets where market regulations are weak,manipulation is still rampant.3 Even in the relatively well-regulated US market,Aggarwal and Wu(2003)have documented hundreds of cases of price manipulation in the 1990s. Following Allen and Gale (1992),we classify manipulation into three categories: information-based manipulation,action-based manipulation,and trade-based manipulation. Information-based manipulation is carried out by releasing false information or spreading misleading rumors.The operation of"trading pools"in the United States during the 1920s gives examples of information-based manipulation.A group of investors would combine to form a pool: first to buy a stock,then to spread favorable rumors about the firm,and finally to sell out at a profit.The striking cases of Enron and Worldcom in 2001 might also be related to information-based manipulation.Van Bommel (2003)shows the role of rumors in facilitating price manipulation.Benabou and Laroque (1992)show that if an opportunistic individual has 3 For example,China's worst stock-market crime in 2002 was a scheme by seven people,including two former China Venture Capital executives,accused of using $700 million and 1,500 brokerage accounts nationwide to manipulate the company share price.4 model. The rest of the paper is structured as follows. The next section reviews the literature of manipulation. Section 2 sets up the theoretical model. Section 3 solves the model for the “pump-and-dump” strategy and then extends the model to include the “dump and cover” strategy. Section 4 investigates the implications of the model on several well-known asset-pricing anomalies. Section 5 provides some empirical evidence from the SEC prosecution of “pump-and-dump” manipulation cases. Section 6 concludes. 1. A Review of the Manipulation Literature Market manipulation is an issue that is almost as old as the earliest stock market. Even though market manipulation might be much more severe in the early years of financial markets, it is too early to say that manipulation is no longer of importance. In modern financial markets, manipulations are often taken in hidden ways that cannot be easily detected and outlawed. In many emerging markets where market regulations are weak, manipulation is still rampant.3 Even in the relatively well- regulated US market, Aggarwal and Wu (2003) have documented hundreds of cases of price manipulation in the 1990s. Following Allen and Gale (1992), we classify manipulation into three categories: information-based manipulation, action-based manipulation, and trade-based manipulation. Information-based manipulation is carried out by releasing false information or spreading misleading rumors. The operation of “trading pools” in the United States during the 1920s gives examples of information-based manipulation. A group of investors would combine to form a pool: first to buy a stock, then to spread favorable rumors about the firm, and finally to sell out at a profit. The striking cases of Enron and Worldcom in 2001 might also be related to information-based manipulation. Van Bommel (2003) shows the role of rumors in facilitating price manipulation. Benabou and Laroque (1992) show that if an opportunistic individual has 3 For example, China's worst stock-market crime in 2002 was a scheme by seven people, including two former China Venture Capital executives, accused of using $700 million and 1,500 brokerage accounts nationwide to manipulate the company share price