PHILADELPHIA–(BUSINESS WIRE)–Wharton Research Data Services (WRDS), the award-winning data research platform and business intelligence tool for corporate, academic and government institutions worldwide, is pleased to announce Umit G. Gurun, Professor of Accounting and Finance at the University of Texas at Dallas; Noah Stoffman, Associate Professor of Finance at Indiana University; and Scott E. Yonker, Assistant Professor and the Lynn A. Calpeter Sesquicentennial Faculty Fellow in Finance at Cornell University as the winners of the Wharton-WRDS Best Paper Award at the Western Finance Association Conference. Their paper, Trust Busting: The Effect of Fraud on Investor Behavior, examines the impact of trust in the financial intermediation industry by researching asset flows following the trust shock produced by the Madoff Ponzi scheme.
This research is the first of its kind to find quantitatively the impact of trust on investing. Gurun, Stoffman and Yonker were able to disentangle the role trust plays with financial intermediaries by looking at investors exposed by geography and social networks to the Madoff Ponzi scheme. Previous research on trust surveyed country level data on the financial sectors broadly, without providing empirical data linking trust to specific events and impacted populations.
The research has already caught the attention of regulators and further analysis is underway.
In examining the exposed population—people who knew victims of the fraud or who lived in areas where many victims lived—across time periods surrounding the discovery of the fraud, the researchers determined how many asset managers in those areas retained clients, retained asset levels in their investment portfolios, were out of business after the fraud how many assets flowed from investments accounts to banks.
The research findings show that:
- Investors in communities that were more exposed to the fraud withdrew assets from investment advisers and increased cash deposits at banks.
- Exposed advisers were more likely to close.
- Advisers who provided services that can build trust experienced lower withdrawals, while those with the ability to steal from their clients experienced greater withdrawals.
“We are very impressed with the research conducted by Professors Umit, Stoffman and Yonker,” said Robert Zarazowski, Managing Director of WRDS. “Their ability to provide quantifiable data on trust is important for both academic researchers and regulators. This paper is already making an impact, which is exactly the type of work WRDS is pleased to highlight.”
The researchers used court documents, Google search data, assets under management forms, FDIC bank deposit data, SEC ADV data and Wharton Research Data Services (WRDS).
“We are honored to receive the Wharton-WRDS Best Paper Award,” said Scott Yonker. “We are really pleased to share our findings more broadly and advance the understanding of trust and its impact on investment intermediaries.”
Harvard Law School Forum on Corporate Governance and Financial Regulation: https://corpgov.law.harvard.edu/2016/02/18/trust-busting-the-effect-of-fraud-on-investor-behavior/
Professor Stoffman’s interview about the paper and impact of the trust shock: http://www.theindychannel.com/news/local-news/abc-series-looks-at-rise-fall-of-bernie-madoff
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