Trust Busting: The Effect of Fraud on Investor Behavior. (12th July 2017)

• Record Type: Journal Article
• Authors: Gurun, Umit G; Stoffman, Noah; Yonker, Scott E
• Is Part Of: Review of financial studies. Volume 31:Number 4(2018)
• Page Start: 1341
• Page End: 1376
• Publication Date: 2017-07-12
• Subjects: Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhx058
• Languages: English
• ISSNs: 0893-9454

Abstract

Abstract: We study the importance of trust in the investment advisory industry by exploiting the geographic dispersion of victims of the Madoff Ponzi scheme. Residents of communities that were exposed to the fraud subsequently withdrew assets from investment advisers and increased deposits at banks. Additionally, exposed advisers were more likely to close. Advisers who provided services that can build trust, such as financial planning advice, experienced fewer withdrawals. Our evidence suggests that the trust shock was transmitted through social networks. Taken together, our results show that trust plays a critical role in the financial intermediation industry. Received April 18, 2016; editorial decision March 8, 2017 by Editor Robin Greenwood.