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Trust in Financial Markets

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  • Colin Mayer

Abstract

This paper examines contemporaneous and historical evidence on the structure of ownership and control of corporate sectors in developed countries to draw lessons for development of financial markets. It records the critical role that equity markets played in the ownership and financing of corporations at the beginning of the 20th century. It notes that this occurred in the absence of formal systems of regulation and that equity markets functioned on the basis of informal relationships of trust. These were sustained through local stock markets in the UK, banks in Germany, and business coordinators and family firms in Japan. The paper explores the concept of trust that is required to promote the development of financial markets.

Suggested Citation

  • Colin Mayer, 2008. "Trust in Financial Markets," European Financial Management, European Financial Management Association, vol. 14(4), pages 617-632, September.
    • Handle: RePEc:bla:eufman:v:14:y:2008:i:4:p:617-632
    DOI: 10.1111/j.1468-036X.2008.00454.x
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    References listed on IDEAS

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    1. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
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    8. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    9. Franks, Julian & Mayer, Colin & Wagner, Hannes F., 2005. "The Origins of the German Corporation – Finance, Ownership and Control," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 65, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    10. Franks, Julian & Mayer, Colin, 1998. "Bank control, takeovers and corporate governance in Germany," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1385-1403, October.
    11. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2001. "Legal Theories of Financial Development," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 17(4), pages 483-501.
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    Cited by:

    1. Dan Amiram & Zahn Bozanic & James D. Cox & Quentin Dupont & Jonathan M. Karpoff & Richard Sloan, 2018. "Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature," Review of Accounting Studies, Springer, vol. 23(2), pages 732-783, June.
    2. Brandon N. Cline & Claudia R. Williamson, 2020. "Trust, regulation, and contracting institutions," European Financial Management, European Financial Management Association, vol. 26(4), pages 859-895, September.
    3. Stimel, Derek & Sekerka, Leslie E., 2018. "Play fair! Innovating internal self-regulation in the market for profit," Business Horizons, Elsevier, vol. 61(1), pages 115-124.
    4. Klabunde, Anna, 2013. "How Much Should an Investor Trust the Startup Entrepreneur? - A Network Model," Ruhr Economic Papers 450, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    5. Manuela Geranio & Giovanna Zanotti, 2012. "Equity Markets Do Not Fit All: an Analysis of Public†to†Private Deals in Continental Europe," European Financial Management, European Financial Management Association, vol. 18(5), pages 867-895, November.
    6. repec:zbw:rwirep:0450 is not listed on IDEAS
    7. Andrikopoulos, Andreas, 2015. "Truth and financial economics: A review and assessment," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 186-195.
    8. Allen, Franklin & Qian, Jun & Zhang, Chenying, 2011. "An Alternative View on Law, Institutions, Finance and Growth," Working Papers 11-64, University of Pennsylvania, Wharton School, Weiss Center.
    9. Ding Chen & Simon Deakin & Mathias Siems & Boya Wang, 2016. "Law, Trust & Institutional Change in China: Evidence from Qualitative Fieldwork," Working Papers wp485, Centre for Business Research, University of Cambridge.
    10. Park, Na Young, 2020. "Trust and trusting behavior in financial institutions: Evidence from South Korea," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 408-419.
    11. Klaus Gugler, 2013. "The determinants of rent extraction in the parent-subsidiary relation," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 40(2), pages 343-362, May.
    12. Giovanni Dosi & Valérie Revest & Alessandro Sapio, 2016. "Financial regimes, financialization patterns and industrial performances : preliminary remarks," Post-Print halshs-01418040, HAL.
    13. Brandon N. Cline & Claudia R. Williamson & Haoyang Xiong, 2022. "Trust, regulation, and market efficiency," Public Choice, Springer, vol. 190(3), pages 427-456, March.
    14. Kroeger, Frens, 2015. "The development, escalation and collapse of system trust: From the financial crisis to society at large," European Management Journal, Elsevier, vol. 33(6), pages 431-437.
    15. Zhu, Bo & Wang, Yansen, 2024. "Does social trust affect firms' ESG performance?," International Review of Financial Analysis, Elsevier, vol. 93(C).
    16. Janette Rutterford & Dimitris P. Sotiropoulos & Carry van Lieshout, 2017. "Individual investors and local bias in the UK, 1870–1935," Economic History Review, Economic History Society, vol. 70(4), pages 1291-1320, November.
    17. Roe Mark J., 2012. "Capital Markets and Financial Politics: Preferences and Institutions," Capitalism and Society, De Gruyter, vol. 7(1), pages 1-40, November.
    18. Anna Klabunde, 2013. "How Much Should an Investor Trust the Startup Entrepreneur? - A Network Model," Ruhr Economic Papers 0450, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    19. Ozili, Peterson K, 2020. "100 quotes from the global financial crisis: lessons for the future," MPRA Paper 115824, University Library of Munich, Germany.
    20. Roe, Mark J. & Siegel, Jordan I., 2011. "Political instability: Effects on financial development, roots in the severity of economic inequality," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 279-309, September.

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