Financial Fraud and Investor Awareness

Zhengqing Gui (), Yangguang Huang () and Xiaojian Zhao
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Zhengqing Gui: Economics and Management School, Wuhan University
Yangguang Huang: Department of Economics, Hong Kong University of Science and Technology

No 202002, HKUST CEP Working Papers Series from HKUST Center for Economic Policy

Abstract: We study a retail financial market with naive investors who are unaware of the possible financial fraud. In our model, firms strategically choose whether to offer normal or fraudulent products to possibly unaware investors. Having new firms in the market makes offering normal products less profitable and thus discourages firms from behaving honestly. In a leader-follower environment, an honest firm may sell a normal product to sophisticated investors, while a dishonest firm targets only naive investors. By disclosing information about financial fraud, the honest firm can steal market share from the dishonest firm, but doing so may induce the dishonest firm to deviate and compete for the normal-product market, which limits the honest firm's incentive to disclose information. Policy instruments, such as increasing legal punishment, implementing a public education program, and lowering the interest rate ceiling, may also trigger the honest firm to strategically shroud information. As a consequence, these policies cannot ensure an improvement in investors' welfare.

Keywords: Product design; Heterogeneous firms; Trade liberalization; Consumer search (search for similar items in EconPapers)
JEL-codes: F10 F12 L15 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-bec
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Related works:
Journal Article: Financial fraud and investor awareness (2024)
Working Paper: Financial Fraud and Investor Awareness (2021)
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