Summary:
A Ponzi scheme is a fraudulent investment operation that pays quick returns to initial contributors using the money from subsequent contributors rather than profit. Despite their frequent occurrence, there is little empirical evidence on how Ponzi schemes operate due to their characteristic of concealment. Therefore, this paper first highlights why investors partake in Ponzi schemes by examining data on the 889,000 investors in E-Zu-Bao (EZB hereafter). EZB was a typical Ponzi scheme that operated under the disguise of peer-to-peer (P2P) lending and in which millions of investors lost their wealth. P2P lending is a platform that matches lenders with borrowers through online services. In 2014 and 2015, EZB was one of the most popular lending platforms in China's P2P lending industry. However, the Beijing First Intermediate People's Court identified EZB as a Ponzi scheme. To examine how EZB operated, we examine a dataset of 3,142,300 investments, comprising RMB74.1 billion (more than USD10 billion) in total, contributed by the company's 889,089 investors. All of the regressions in this paper use ordinary least square models. In the regressions investigating the internal factors influencing why investors participate in the Ponzi scheme, the main dependent variables are the principals to be recovered and the main independent variables are the investment sequences. The principal to be recovered is measured as the total investment amount minus the received interest and the principal. To consider the external factors, we use a CCTV advertisement for an event study. The initial investment amounts of new investors and the principals to be recovered of the existing investors are used as dependent variables. The dummy time variables, which measure the interval between viewing the CCTV advertisement and investment, are independent variables. We believe that trust is the main reason why investors participate in a Ponzi scheme. First, through their research, investors gradually built trust in the platform, which is consistent with the idea that trust can come from repeated gaming (Kreps and Wilson, 1982; Durlauf and Fafchamps, 2005). The empirical results show that the more the investors invested, the greater the principal that needed to be recovered. In the process of gaming on the platform, investors established trust due to the positive feedback they gained from the platform. Second, the peer effect is also likely to have influenced investors' trust in the platform. Tho ni and Gachter (2015) believe that the peer effect is important for building trust in dynamic gaming. With the extension of the survival time of EZB, investors increased their investments at a faster rate. Investors are also influenced by the investment decisions of peer investors. Therefore, as the number of investors increased, investors deepened their trust in the platform. External trust endorsement is also an important factor. We find that the initial investment amounts of new investors and the principal to be recovered by existing investors both significantly increased after the CCTV advertisement was broadcast. The endorsement of the CCTV advertisement led investors to believe that the platform was reliable, and thus increased their trust in the platform. In this paper, we add to the literature by studying a Ponzi scheme from an internal perspective. The literature on trust has focused on its influence and the factors that lead to the emergence of social trust (La Porta et al., 1997; Guiso et al., 2004; Guiso et al., 2009; Gurun et al., 2018). In contrast, this paper concentrates on the reasons why investors trusted EZB. Moreover, the majority of the research on Ponzi schemes has been theory oriented, and limited empirical research has been conducted as a result of a lack of data. Deason et al. (2015) concentrate on the cross-sectional characteristics of Ponzi schemes, whereas Gurun et al. (2018) focus on the externalities of Ponzi schemes. To the best of our knowledge, this paper is the first to study the internal features of a Ponzi scheme, and our findings contribute to our understanding of how such schemes operate. In addition to the theoretical contributions, this paper provides some insights for regulators. First, financial supervision departments should focus more on screening for cases of fraud and providing warnings. Second, investors trusted in the EZB platform as a result of their own investment experience and the endorsement of external parties. Thus, the authorities should improve their supervision of the advertising broadcast on TV stations. The relevant departments should also clarify the social and economic attributes of different TV channels and seek to balance their propaganda and management functions.
王正位, 王新程, 廖理. 信任与欺骗:投资者为什么陷入庞氏骗局？——来自e租宝88.9万名投资者的经验证据[J]. 金融研究, 2019, 470(8): 96-112.
WANG Zhengwei, WANG Xincheng, LIAO Li. Trust and Fraud: Why Do Investors Participate in Ponzi Schemes？ Empirical Evidence from the Investors in E-Zu-Bao. Journal of Financial Research, 2019, 470(8): 96-112.
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