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Corporate Scandals and Household Stock Market Participation

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  • Giannetti, Mariassunta
  • Wang, Tracey Yue

Abstract

We show that after the revelation of corporate fraud in a state, the equity holdings of households in that state decrease significantly both in the extensive and the intensive margins. Using an exogenous shock to fraud detection and exogenous variation in households’ lifetime experiences of corporate fraud, we establish that the impact of fraud revelation in local companies on household stock market participation is causal. Even households that did not hold stocks in the fraudulent firms decrease their equity holdings, and all households decrease their holdings in fraudulent firms as well as non-fraudulent firms. As a consequence of the decrease in local households’ demand for equity, firms headquartered in the same state as the fraudulent firms experience a decrease in valuation and in the number of shareholders.

Suggested Citation

  • Giannetti, Mariassunta & Wang, Tracey Yue, 2014. "Corporate Scandals and Household Stock Market Participation," CEPR Discussion Papers 9834, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9834
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Marcel Prokopczuk & Francesco D'Acunto & Michael Weber, 2015. "Distrust in Finance Lingers: Jewish Persecution and Households' Investments," 2015 Meeting Papers 26, Society for Economic Dynamics.
    2. Sane, Renuka, 2018. "Stock Market Trading in the Aftermath of an Accounting Scandal," Working Papers 18/198, National Institute of Public Finance and Policy.
    3. Rafael Di Tella & Juan Dubra & Alejandro Luis Lagomarsino, 2016. "Meet the Oligarchs: Business Legitimacy, State Capacity and Taxation," NBER Working Papers 22934, National Bureau of Economic Research, Inc.
    4. repec:spr:reaccs:v:23:y:2018:i:2:d:10.1007_s11142-017-9435-x is not listed on IDEAS
    5. Makoto Yano & Takashi Komatsubara, 2014. "Participation of Ordinary Investors and Stock Market Quality: A Comparison between Japanese and US Markets," Pacific Economic Review, Wiley Blackwell, vol. 19(5), pages 537-558, December.
    6. Cumming, Douglas & Dannhauser, Robert & Johan, Sofia, 2015. "Financial market misconduct and agency conflicts: A synthesis and future directions," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 150-168.
    7. Asgharian, Hossein & Liu, Lu & Lundtofte, Frederik, 2014. "Institutional Quality, Trust and Stock-Market Participation: Learning to Forget," Working Papers 2014:39, Lund University, Department of Economics.
    8. Jesse Bricker & Geng Li, 2017. "Credit Scores, Social Capital, and Stock Market Participation," Finance and Economics Discussion Series 2017-008, Board of Governors of the Federal Reserve System (US).
    9. repec:spr:jecfin:v:43:y:2019:i:2:d:10.1007_s12197-018-9462-x is not listed on IDEAS
    10. repec:kap:jbuset:v:155:y:2019:i:2:d:10.1007_s10551-017-3495-5 is not listed on IDEAS
    11. Christian Leuz & Steffen Meyer & Maximilian Muhn & Eugene Soltes & Andreas Hackethal, 2017. "Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation," NBER Working Papers 24083, National Bureau of Economic Research, Inc.
    12. Gibson, Rajna & Sohn, Matthias & Tanner, Carmen & Wagner, Alexander F, 2018. "Investing in managerial honesty," CEPR Discussion Papers 13207, C.E.P.R. Discussion Papers.
    13. Stephen G. Dimmock & William C. Gerken, 2016. "Regulatory Oversight and Return Misreporting by Hedge Funds," Review of Finance, European Finance Association, vol. 20(2), pages 795-821.
    14. repec:gam:jsusta:v:10:y:2018:i:6:p:1904-:d:151130 is not listed on IDEAS
    15. repec:eee:dyncon:v:90:y:2018:i:c:p:98-117 is not listed on IDEAS

    More about this item

    Keywords

    corporate scandal; corporate securities fraud; household stock market participation; local bias;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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