Trading Volume Manipulation and Competition Among Centralized Crypto Exchanges

How competition affects manipulation by firms of information about important attributes of their products and how such information manipulation impacts firms’ short-term and long-term performance are open empirical questions. We use a setting that is especially suitable for answering these questions—centralized crypto exchanges, on which information manipulation takes the form of inflated trading volume. We find that static and dynamic competition measures are positively associated with volume inflation, indicating that competition may lead to increased information manipulation. Exchanges that manipulate volume obtain short-run benefits but are punished in the long run, consistent with the trade-off between short-lived increases in rents and future losses because of damaged reputation. This paper was accepted by Agostino Capponi, finance. Funding: The authors thank the Israel Science Foundation [Grant 2225/21], the Coller School of Management Blockchain Research Institute, the Henry Crown Institute for Business Research in Israel, and the Cornell Fintech Initiative for financial support. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.02903 .