Corporate Scandals and Household Stock Market Participation

Corporate Scandals and Household Stock Market Participation

Mariassunta Giannetti, Tracy Wang

Series number :

Serial Number: 
405/2014

Date posted :

January 01 2014

Last revised :

October 28 2018
SSRN Share

Keywords

  • corporate securities fraud • 
  • corporate scandal • 
  • household stock marketparticipation • 
  • local bias

We show that after the revelation of corporate fraud in a state, household stock market participation in that state decreases. Households decrease their holdings in fraudulent as well as non-fraudulent firms, even if they did not hold stocks in fraudulent firms. Within a state, households with more lifetime experience of corporate fraud hold less equity.

Furthermore, following the arguably exogenous increase in fraud revelation due to the Arthur Andersen’s demise, a one-standard-deviation increase in fraud revelation due to the presence of Arthur Andersen’s clients increases the probability that a household exits the stock market by 7 percentage points. We provide evidence that the negative effect of fraud revelation on stock market participation is likely to be due to a loss of trust in the stock market.

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Published in

Published in: 
Publication Title: 
The Journal of Finance
Description: 
Volume 71, Issue 6, Pages 2591-2636

Authors

Professor
Real name:
Tracy Wang
University of Minnesota