Events

Finance Seminar

Author:

• Umit G. Gurun
  University of Texas at Dallas

• Noah Stoffman
  Indiana University

• Scott E. Yonker
  Cornell University

We exploit the geographic dispersion of victims of a multi-billion dollar Ponzi scheme to study the effect of trust on investor behavior. We show that investors in communities that were more exposed to the fraud subsequently withdrew assets from registered investment advisers and increased cash deposits at banks. Additionally, investment advisers with clients in areas with more victims were substantially more likely to shut down operations. Additional evidence suggests that this shock to trust was transmitted through social networks. Taken together, our results suggest that trust is a critical determinant of asset allocation and has real economic effects.