69 Pages Posted: 28 Sep 2013 Last revised: 14 Jul 2015
Date Written: July 13, 2015
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: 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
By Alex Edmans