Speaker: Dr. Yangguang Huang (Hong Kong University of Science and Technology)
Financial Fraud and Investor Awareness
Room A619, Teaching A
Dr. Yangguang Huang (Hong Kong University of Science and Technology)
In the experiment and survey, we find that investors, especially risk-averse ones, are less likely to invest in fraudulent financial products with unrealistically high returns after receiving an eye-opening education program. This suggests that investors being exploited by financial fraud is due to unawareness instead of risk-seeking preferences. We construct a model where firms strategically choosing whether to offer fraudulent product to unaware investors. Education reduces the fraction of naive investors, and thus, can attenuate or even eliminate the firm's incentive to commit financial fraud. We then study the roles of price competition, information disclosure, and regulatory instruments such as interest rate ceiling and legal punishment, and find that none of them guarantees an improvement of investors' welfare.