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
Date Written: September 1, 2017
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: Suggested Citation