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Financial Fraud and Investor Awareness

Author

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  • Yangguang (Sunny) Huang

    (Assistant Professor, Department of Economics
    HKUST IEMS Faculty Associate
    Hong Kong University of Science and Technology)

Abstract

Financial fraud refers to firms taking deceptive actions to exploit investors, such as Ponzi schemes and running away with the money. The existence of many financially “illiterate” investors opens the door for financial fraud because these investors are likely to be attracted by products that offer too-good-to-be-true returns. Our experiment and survey suggest that some investors are unaware of the possible financial fraud of high-return products, justifying policy intervention. A simple eye-opening education program can reduce the proportion of naive investors which helps them make better decisions and also reduces, if not eliminates, the firms’ incentive to commit financial fraud. Competition makes offering normal products less profitable and thus discourages firms from behaving honestly. Policy instruments such as interest rate ceilings, legal punishment, and public education programs, may trigger honest firms to strategically shroud information. Consequently, these policies cannot ensure an improvement in investors’ welfare.

Suggested Citation

  • Yangguang (Sunny) Huang, 2019. "Financial Fraud and Investor Awareness," HKUST IEMS Thought Leadership Brief Series 2019-27, HKUST Institute for Emerging Market Studies, revised May 2019.
    • Handle: RePEc:hku:briefs:201927
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    File URL: https://iems.ust.hk/assets/publications/thought-leadership-briefs/tlb19/tlb27/huang-fraud-iems-tlb27.pdf
    File Function: First version, 2019
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    Cited by:

    1. Loretta Mastroeni & Maurizio Naldi & Pierluigi Vellucci, 2023. "Personal Finance Decisions with Untruthful Advisors: An Agent-Based Model," Computational Economics, Springer;Society for Computational Economics, vol. 61(4), pages 1477-1522, April.

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    Keywords

    China; Global Economy;

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