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Financial Fraud and Investor Awareness

Author

Listed:
  • Zhengqing Gui

    (Economics and Management School, Wuhan University)

  • Yangguang Huang

    (Department of Economics, Hong Kong University of Science and Technology)

  • Xiaojian Zhao

    (Monash University and Chinese University of Hong Kong (Shenzhen))

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.

Suggested Citation

  • Zhengqing Gui & Yangguang Huang & Xiaojian Zhao, 2020. "Financial Fraud and Investor Awareness," HKUST CEP Working Papers Series 202002, HKUST Center for Economic Policy.
    • Handle: RePEc:hke:wpaper:wp2020-02
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    References listed on IDEAS

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    More about this item

    Keywords

    Product design; Heterogeneous firms; Trade liberalization; Consumer search;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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