Trust Busting: The Effect of Fraud on Investor Behavior

61 Pages Posted: 24 Sep 2015 Last revised: 22 Nov 2016

Umit G. Gurun

University of Texas at Dallas - Naveen Jindal School of Management

Noah Stoffman

Indiana University - Kelley School of Business - Department of Finance

Scott E. Yonker

Cornell University - Dyson School of Applied Economics and Management

Date Written: November 3, 2015

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 more 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 experienced lower 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.

Keywords: Trust, Ponzi, Asset Allocation, Investment Advisors, Fraud, Affinity

JEL Classification: G02, G21, G23, H31

Suggested Citation

Gurun, Umit G. and Stoffman, Noah and Yonker, Scott E., Trust Busting: The Effect of Fraud on Investor Behavior (November 3, 2015). Kelley School of Business Research Paper No. 15-70. Available at SSRN: https://ssrn.com/abstract=2664307 or http://dx.doi.org/10.2139/ssrn.2664307

Umit G. Gurun

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Noah Stoffman

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
(812) 856-5664 (Phone)

HOME PAGE: http://kelley.iu.edu/nstoffma/

Scott E. Yonker (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

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