|
|
|
| Trust and Fraud: Why Do Investors Participate in Ponzi Schemes？ Empirical Evidence from the Investors in E-Zu-Bao |
| WANG Zhengwei, WANG Xincheng, LIAO Li
|
| PBC School of Finance, Tsinghua University |
|
|
|
Abstract 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.
|
|
Received: 04 April 2018
Published: 23 August 2019
|
|
|
|
|
| [1] |
崔巍,2011,《证券投资中的信任及影响因素研究》,《金融研究》第9期,第152～161页。
|
| [2] |
黄小勇,2015,《央视黄金资源广告能促进销售吗？》,《经济学(季刊)》第3期,第1541～1562页。
|
| [3] |
李涛,2006,《社会互动、信任与股市参与》,《经济研究》第1期,第34～45页。
|
| [4] |
廖理、李梦然和王正位,2014,《聪明的投资者:非完全市场化利率与风险识别——来自P2P网络借贷的证据》,《经济研究》第7期,第125～137页。
|
| [5] |
王正位、邓颖惠和廖理,2016,《知识改变命运:金融知识与微观收入流动性》,《金融研究》第12期,第111～127页。
|
| [6] |
Alesina, Alberto, and Eliana La Ferrara, 2002, “Who Trusts Others?” Journal of Public Economics, 85(2): 207~234.
|
| [7] |
Anderson, Axel, and Lones Smith. 2013. “Dynamic Deception.” American Economic Review, 103(7): 2811~2847.
|
| [8] |
Deason, S., Rajgopal, S., and G. B. Waymire. 2015. “Who Gets Swindled in Ponzi Schemes？” Working Paper.
|
| [9] |
Duarte, J., S. Siegel, and L. Young. 2012. “Trust and Credit: the Role of Appearance in Peer-to-peer Lending.” The Review of Financial Studies, 25: 2455～2484.
|
| [10] |
Durlauf, S. N., and M.Fafchamps. 2005. “Chapter 26 – Social Capital.” Handbook of Economic Growth, 1∶1639～1699.
|
| [11] |
Franklin, A., and G.R. Faulhaber. 1988. “Optimism Invites Deception.” The Quarterly Journal of Economics, 103∶397～407.
|
| [12] |
Gennaioli, N., Shleifer, A., and R. Vishny. 2015. “Money Doctors.” The Journal of Finance, 70: 91～114.
|
| [13] |
Guiso, L., Sapienza, P., and L. Zingales. 2004. “The Role of Social Capital in Financial Development.” The American Economic Review, 94: 526～556.
|
| [14] |
Gurun, U., Stoffman, N., and S. Yonker. 2018. “Trust Busting: The Effect of Fraud on Investor Behavior.” Review of Financial Studies, 31(4): 1341～1376.
|
| [15] |
Henriques, D., 2012. “The Wizard of Lies.” New York, NY: St. Martin's Griffin.
|
| [16] |
Kreps,D. and R. Wilson. 1982. “Reputation and Imperfect Information.” Journal of Economic Theory, 27(2):253～79.
|
| [17] |
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and R. Vishny. 1997. “Trust in Large Organizations.” The American Economic Review, 87∶333～338.
|
| [18] |
Morris, S. 1996. “Speculative Investor Behavior and Learning.” The Quarterly Journal of Economics, 111: 1111～1133.
|
| [19] |
Thöni, C., and S. Gchter. 2015. “Peer Effects and Social Preferences in Voluntary Cooperation: a Theoretical and Experimental Analysis.” Journal of Economic Psychology, 48(5036):72～88.
|
| [20] |
Zuckoff, M., 2006. “Ponzi's Scheme: The True Story of a Financial Legend.” New York, NY: Random House.
|
|
|
|
