Can call auction reduce closing price manipulation in the stock market?

This paper tests whether the new trading mechanism reduces closing price manipulation in the Chinese stock market. The introduction of the closing call auction on the Shanghai Stock Exchange on 20 August 2018 can be considered a quasi-natural experiment. Using data from 2017 to 2018 for all companies listed on the main board of the Shanghai and Shenzhen Stock Exchanges, we provide robust evidence that the implementation of call auction on the Shanghai Stock Exchange can effectively reduce closing price manipulation in stock market. We further investigate the impact of various factors, including firm industry, ownership structure, secondary market trading, equity structure, and financial structure, on the effectiveness of call auction in mitigating closing price manipulation. Moreover, the mechanism study indicates that the introduction of closing call auction would improve the operation efficiency and information efficiency of stock market, thus reducing the closing price manipulation. Specifically, our results reveal that the closing call auction policy is effective in reducing manipulation and provides theoretical support for stock market institutional construction.