Voice of the Customers: Local Trusting Culture and Consumers’ Whistle-Blowing in the Financial Services Industry

50 Pages Posted: 6 Nov 2017 Last revised: 27 Jul 2018

See all articles by Feng Jiang

Feng Jiang

University at Buffalo - School of Management

Yihui Pan

University of Utah - Department of Finance

Date Written: September 1, 2017

Abstract

We study the interplay between social norms and the effectiveness of consumer protection laws through private citizens’ whistle-blowing. Using complaints filed to the Consumer Financial Protection Bureau, we find that a higher state-level attitude of trust, especially through the exogenous effect of higher local religiosity, reduces the number of complaints filed against financial institutions in that state. Consumer complaints appear to serve as early whistle-blowing: the intensity of consumer complaints a financial institution receives is negatively associated with its subsequent opportunistic behaviors in financial reporting, especially myopic behaviors induced by managerial incentives. Consumer whistle-blowing is more effective when there is stronger product market competition, which suggests banks’ desire to retain customers is an important channel for the governance effect from consumer complaints. Our study sheds light on the interaction between informal culture and formal institutions as the guardrails for economic exchange and on the role of stakeholders in corporate governance.

Keywords: Culture; Trust; Whistleblowing

JEL Classification: G21; G32

Suggested Citation

Jiang, Feng and Pan, Yihui, Voice of the Customers: Local Trusting Culture and Consumers’ Whistle-Blowing in the Financial Services Industry (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=3064809 or http://dx.doi.org/10.2139/ssrn.3064809

Feng Jiang

University at Buffalo - School of Management ( email )

344 Jacobs Management Center
Buffalo, NY 14260
United States
716-645-3225 (Phone)

Yihui Pan (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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