Corporate Scandals and Household Stock Market Participation

69 Pages Posted: 28 Sep 2013 Last revised: 14 Jul 2015

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: July 13, 2015

Abstract

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.

Keywords: corporate securities fraud, corporate scandal, household stock market participation, local bias

JEL Classification: G30, D12, D14

Suggested Citation

Giannetti, Mariassunta and Wang, Tracy Yue, Corporate Scandals and Household Stock Market Participation (July 13, 2015). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 405/2014. Available at SSRN: https://ssrn.com/abstract=2331588 or http://dx.doi.org/10.2139/ssrn.2331588

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
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SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

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