Experimental & Behavioural Economics Seminar - Zhengqing Gui (Wuhan University)

Room 315, Level 3, FBE Building, 111 Barry Street, Carlton

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Siqi Pan

siqi.pan@unimelb.edu.au

Title: Financial Fraud and Investor Awareness

Abstract: Our experiment and survey suggest that some investors are unaware of the possible financial fraud of high-return products. Motivated by this finding, we build a model with boundedly rational investors and firms strategically choosing whether to offer normal or fraudulent products. 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.