Corporate Scandals and Household Stock Market Participation

  • Author(s): MARIASSUNTA GIANNETTI, TRACY YUE WANG
  • Published: Nov 10, 2016
  • Pages: 2591-2636
  • DOI: 10.1111/jofi.12399

ABSTRACT

We show that, after the revelation of corporate fraud in a state, household stock market participation in that state decreases. Households decrease holdings in fraudulent as well as nonfraudulent firms, even if they do not hold stocks in fraudulent firms. Within a state, households with more lifetime experience of corporate fraud hold less equity. Following the exogenous increase in fraud revelation due to Arthur Andersen's demise, states with more Arthur Andersen clients experience a larger decrease in stock market participation. We provide evidence that the documented effect is likely to reflect a loss of trust in the stock market.

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