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Unregulated Stock Markets in Second Life

44 Pages Posted: 21 Oct 2010 Last revised: 11 Jun 2014

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management

Young Jun Cho

Singapore Management University - School of Accountancy

Date Written: October 20, 2010

Abstract

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.

Keywords: Market Efficiency, Financial Market Regulation, Financial Reporting Standards, Behavioral Finance, Insider Trading, Securities Fraud

JEL Classification: G14, G18, M40

Suggested Citation

Bloomfield, Robert J. and Cho, Young Jun, Unregulated Stock Markets in Second Life (October 20, 2010). Johnson School Research Paper Series No. 15-2011. Available at SSRN: https://ssrn.com/abstract=1695057 or http://dx.doi.org/10.2139/ssrn.1695057

Robert J. Bloomfield (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

450 Sage Hall
Ithaca, NY 14853
United States
607-255-9407 (Phone)
607-254-4590 (Fax)

Young Jun Cho

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore

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