“Trust Busting: The Effect of Fraud on Investor Behavior” by Noah Stoffman
Umit G. Gurun
University of Texas at Dallas
Scott E. Yonker
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.