Unregulated Stock Markets in Second Life
Robert J. Bloomfield
Cornell University - Samuel Curtis Johnson Graduate School of Management
Young Jun Cho
Singapore Management University - School of Accountancy
October 20, 2010
Johnson School Research Paper Series No. 15-2011
SLCapex is a stock exchange owned and operated by “residents” of the online virtual world Second Life. Despite its almost complete lack of regulation and legal protections against fraud or insider trading, issuers were able to raise approximately US$145,000 from investors, which grew to US$900,000 in market value before plummeting, resulting in overall investor returns of -71%. Investors in large issuances lost more than investors in small issuances, and small investors experienced more severe losses relative to large investors when more money was at stake, suggesting that the market did a poor job of protecting investors from issuers and of providing a level playing field for investors. Theories from financial economics can explain the markets’ poor performance in the absence of regulatory and legal institutions, but cannot easily explain why issuers were able to raise capital in such a setting.
Number of Pages in PDF File: 44
Keywords: Market Efficiency, Financial Market Regulation, Financial Reporting Standards, Behavioral Finance, Insider Trading, Securities Fraud
JEL Classification: G14, G18, M40
Date posted: October 21, 2010 ; Last revised: June 11, 2014
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