A Research of Investor Protection Based on the Reputation Mechanism

In this paper we establish a reputation mechanism model, based on the effective reaction of rational investors to fresh news, to regard the supervision ability as an endogenous variable, and therefore to analyze the relationship among the listed company, the regulatory authority and the exterior investors. This model may contribute to realization of the exterior investors´ self-protection by impelling the listed company and the regulator to maintain their own reputation. By constructing a reputation mechanism on the securities market, based on Diamond´s model on the bank loan market in 1989, we provide an access to a well-established securities market, that is to promote the rational investors´ ratio in order to strengthen the reputation mechanism on the securities market. Besides, this model provides a benchmark to the problem of selection between centralized supervision and decentralized decision-making.