Working Paper: CEPR ID: DP9834
Authors: Mariassunta Giannetti; Tracy Yue Wang
Abstract: We show that after the revelation of corporate fraud in a state, the equity holdings of households in that state decrease significantly both in the extensive and the intensive margins. Using an exogenous shock to fraud detection and exogenous variation in households? lifetime experiences of corporate fraud, we establish that the impact of fraud revelation in local companies on household stock market participation is causal. Even households that did not hold stocks in the fraudulent firms decrease their equity holdings, and all households decrease their holdings in fraudulent firms as well as non-fraudulent firms. As a consequence of the decrease in local households? demand for equity, firms headquartered in the same state as the fraudulent firms experience a decrease in valuation and in the number of shareholders.
Keywords: corporate scandal; corporate securities fraud; household stock market participation; local bias
JEL Codes: D12; D14; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fraud detection due to Arthur Andersen's collapse (M48) | corporate fraud revelation (G38) |
| corporate fraud revelation (G38) | household stock market participation (G59) |
| households' lifetime experiences of fraud (G51) | household stock market participation (G59) |
| fraud revelation (M48) | equity holdings (G32) |
| equity holdings in fraudulent firms (G32) | household stock market participation (G59) |
| equity holdings in non-fraudulent firms (G32) | household stock market participation (G59) |