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Stock Manipulation By Chinas Pangang Group Case Solution

Solution Id Length Case Author Case Publisher
2204 915 Words (6 Pages) Xin Chen, Michael R King Ivey Publishing : W16074
This solution includes: A Word File A Word File

The earnings growth of the company was quite suspicious and the financial reporting’s seemed to be manipulated. The company’s reported tax payments were not, matching with its profits and the existing tax rates. There were also suspicious reporting’s on other heads such as administrative expense which decline by 33% in one year. The other expense account was also decreased which is quite often used for manipulation by the companies because of its ambiguity factor. The non-recurring items reported under the head of extraordinary gains and losses were also suspicious and seem to be manipulated. The asset impairment account also represents significant changes in a short period of time. All these accounting heads changed the performance of the company significantly and the changes were sudden and of larger magnitude.

Following questions are answered in this case study solution

  1. Pangang Groups Conduct

  2. Incentives for unethical conduct

  3. The ethical course of action

  4. Recommendations

  5. Conclusion

Case Analysis for Stock Manipulation By Chinas Pangang Group

The company improved its profit margins in a short span of time and seem to be overvalued against the peers. Despite the weak operating performance, its P/E ratio was four times higher than its peers which indicated an overvalued company. The most suspicious activity was the shifting of reporting standards in parameters from 2009 to 2010 which change the company’s performance on papers. However, despite all these facts indicating some manipulation, there was a lack of proper evidence to consider Pangang guilty.

2. Incentives for unethical conduct

Chinese capital markets lack the necessary infrastructure, regulations, and environment to maintain the transparency that made it easier for the companies especially the larger companies to manipulate their securities. The incentives for an overvalued stock can be monetary or reputational. If accompany is overvalued against its peers to appears to be bigger or better and the market leaders despite not performing well on other parameters such as operating profit margins. The techniques are multiple ranging from installing fake news I the market to pump and dump the stocks for artificial manipulation of prices (NASDAQ, 2018). Stock prices can be manipulated for providing short-term incentives to shareholders and investors if a stock is overvalued as compared to peers and its price continuously going up it can be sell in the market for a price quite higher than its intrinsic value. Stock market manipulations separate the naïve and novice players from the experts (Tobey, 2021). The stocks with lower trading volumes can be manipulated for higher trades and many short-term intraday investors can get benefited from the higher trading volumes and prices in the short run.

3. The ethical course of action

Chen‘s situation imposes s a dilemma where he cannot turn a blind eye to what is going on and the reporting of the issue could have consequences for him. The situation is more complicated and there was not sufficient evidence to blame the company rather the speculations that were mainly made on the suspicious reporting of the company. There was no shortcut way for proving the Pnagang guilty. The most ethical thing was to gain sufficient evidence and tan report to the regulator but if the stock market is not transparent and the environment promotes these types of activities then there is no point in doing it as it would not serve the purpose.

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