The Construction of a Trustworthy Investment Opportunity: Insights from the Madoff Fraud

63 Pages Posted: 7 Apr 2013 Last revised: 29 Aug 2017

See all articles by Hervé Stolowy

Hervé Stolowy

HEC Paris - Accounting and Management Control Department

Martin Messner

University of Innsbruck

Thomas Jeanjean

ESSEC Business School - Department of Accounting and Management Control

Charles Richard Baker

Adelphi University - School of Business

Date Written: March 9, 2013

Abstract

In this paper, we use the investment fraud of Bernard Madoff to inquire into the production of trust in the context of financial markets. Drawing upon empirical data related to U.S. individual investors (interviews and letters) as well as documentary material, we investigate the mechanisms through which investing with Madoff came to be seen as a trustworthy investment opportunity. We show how different types of information contributed to construct Bernard Madoff as a trustworthy investment manager and how Madoff avoided meeting demands for accountability by manipulating investors in face-to-face encounters. We shed particular light on the role of institution-based forms of trust which play a critical role in facilitating economic exchanges. More specifically, we suggest that the Madoff case illuminates how the provision of information can lead to an “illusion of trustworthiness” that is difficult to escape for investors. An element of such illusion, we suggest, is inherent to the functioning of financial markets more generally.

Keywords: Madoff, trustworthiness, illusion, financial markets

JEL Classification: G1, G3, M41, M42

Suggested Citation

Stolowy, Hervé and Messner, Martin and Jeanjean, Thomas and Baker, Charles Richard, The Construction of a Trustworthy Investment Opportunity: Insights from the Madoff Fraud (March 9, 2013). Contemporary Accounting Research, Forthcoming, HEC Paris Research Paper No. 971/2013, Available at SSRN: https://ssrn.com/abstract=2245700 or http://dx.doi.org/10.2139/ssrn.2245700

Hervé Stolowy (Contact Author)

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas Cedex
France
+33 1 39 67 94 42 (Phone)
+33 1 39 67 70 86 (Fax)

HOME PAGE: http://www.hec.fr/stolowy

Martin Messner

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Thomas Jeanjean

ESSEC Business School - Department of Accounting and Management Control ( email )

Av Bernard Hirsch
Cergy-Pontoise 95021
France

Charles Richard Baker

Adelphi University - School of Business ( email )

1 South Avenue
Garden City, NY 11530
United States
516-877-4628 (Phone)

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