The Anomalous Behavior of Stock Prices on the Canadian Securities Exchange

Abstract

This paper examines the conformity of the distribution of stock prices on the Canadian Securities Exchange (CSE) to that theorized by Benford’s Law (BL). BL follows a logarithm law such that the leading digits have a higher probability of lower numbers such as 1, 2, or 3 versus higher numbers like 7, 8, or 9. This analysis can be used to detect fraudulent manipulation of stock prices. Previous research has applied BL to a broad range of data such as cost data, atomic weights, river areas, and populations, as well as stock prices. After collecting stock prices on the CSE, the number count for each digit was compared to the expected number given the frequencies posited by BL. A chi-square test was employed to determine statistical significance. The first digit was found to adhere to BL; however, the second digit was not congruent with that predicted by BL. There is an indication of possible manipulation on this stock exchange. These mixed results are consistent with the empirical evidence of other researchers. This evidence is relevant to auditors, shareholders, financial analysts, investment managers, government, and the CSE.