The informational efficiency of equity markets plays a crucial role in guiding corporate investment decisions, as stock prices are theorized to aggregate dispersed private information and provide valuable signals to firms. However, this feedback loop can be distorted by information asymmetry and strategic behavior, including costly market manipulation by insiders or firms themselves. This article develops a theoretical model to explore the intricate relationship between price informativeness, corporate investment, and the strategic use of share repurchases in the presence of costly information manipulation. We analyze how firms, possessing private information about their investment opportunities, may strategically engage in share buybacks to influence market perceptions and counteract adverse information, particularly from short sellers. The model reveals conditions under which costly manipulation can obscure true firm value, leading to suboptimal investment. Furthermore, it demonstrates how share repurchases can serve as a complex signaling mechanism, potentially mitigating information asymmetry or, conversely, contributing to market distortions. The findings offer nuanced insights into the real effects of financial markets and the strategic implications for corporate finance and market regulation.

Price Informativeness, Corporate Investment, Information Asymmetry, Costly Manipulation, Share Repurchases, Short Selling, Market Feedback

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