Financial Fraud and Investor Awareness

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

No 2021-06, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: We study a retail financial market with naive investors who are unaware of 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 public education programs, 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 investor welfare.

Keywords: financial fraud; investor naivety; unawareness; shrouding (search for similar items in EconPapers)
JEL-codes: D14 D83 G11 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-cwa and nep-isf
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Financial fraud and investor awareness (2024)
Working Paper: Financial Fraud and Investor Awareness (2020)
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