IDEAS home Printed from https://ideas.repec.org/p/lmu/muenar/20109.html
   My bibliography  Save this paper

A trust-driven financial crisis. Implications for the future of financial markets

Author

Listed:
  • Corsetti, Giancarlo
  • Devereux, Michael P.
  • Guiso, Luigi
  • Hassler, John
  • Saint-Paul, Gilles
  • Sinn, Hans-Werner
  • Sturm, Jan-Egbert
  • Vives, Xavier

Abstract

The financial crisis has brought to light diffuse opportunistic behaviour and some serious frauds. Because of this trust towards banks, bankers, brokers and the stock market has collapsed to unprecedented levels and there are so far no signs of recovery. This paper uses survey-based information to document the collapse of trust, show its link to the emergence of frauds in the financial industry and discuss its consequences for the demand of financial instruments, investors portfolios and more generally investors reliance on financial markets. It argues that unless serious changes happen in the behaviour of the financial industry, the move towards safer portfolios and away from ambiguous securities that lack of trust entails, will have adverse effects on the availability and cost of equity financing. Accordingly a number of proposals to restore trust are discussed. Their common feature is to restore trust – a belief – by limiting the scope for opportunistic behaviour through a transfer of power from financial intermediaries to investors.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Corsetti, Giancarlo & Devereux, Michael P. & Guiso, Luigi & Hassler, John & Saint-Paul, Gilles & Sinn, Hans-Werner & Sturm, Jan-Egbert & Vives, Xavier, 2010. "A trust-driven financial crisis. Implications for the future of financial markets," Munich Reprints in Economics 20109, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:20109
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Philippe Aghion & Yann Algan & Pierre Cahuc & Andrei Shleifer, 2010. "Regulation and Distrust," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(3), pages 1015-1049.
    2. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2008. "Trusting the Stock Market," Journal of Finance, American Finance Association, vol. 63(6), pages 2557-2600, December.
    3. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-135, January.
    4. Tullio Jappelli, 2010. "Economic Literacy: An International Comparison," Economic Journal, Royal Economic Society, vol. 120(548), pages 429-451, November.
    5. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "The Role of Social Capital in Financial Development," American Economic Review, American Economic Association, vol. 94(3), pages 526-556, June.
    6. Markus Knell & Helmut Stix, 2009. "Trust in Banks? Evidence from normal times and from times of crises," Working Papers 158, Oesterreichische Nationalbank (Austrian Central Bank).
    7. repec:spo:wpmain:info:hdl:2441/4km7l02j139aj8hl7kcccmqk9s is not listed on IDEAS
    8. Carlin, Bruce Ian & Dorobantu, Florin & Viswanathan, S., 2009. "Public trust, the law, and financial investment," Journal of Financial Economics, Elsevier, vol. 92(3), pages 321-341, June.
    9. Paola Sapienza, 2009. "Trust and Financial Markets," World Scientific Book Chapters, in: Douglas D Evanoff & Philipp Hartmann & George G Kaufman (ed.), The First Credit Market Turmoil Of The 21st Century Implications for Public Policy, chapter 4, pages 29-38, World Scientific Publishing Co. Pte. Ltd..
    10. Luigi Guiso & Tullio Jappelli, 2008. "Financial Literacy and Portfolio Diversification," EIEF Working Papers Series 0812, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2008.
    11. repec:hal:spmain:info:hdl:2441/4km7l02j139aj8hl7kcccmqk9s is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Giancarlo Corsetti & Michael P. Devereux & Luigi Guiso & John Hassler & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2010. "Chapter 2: A trust-driven financial crisis," EEAG Report on the European Economy, CESifo, vol. 0, pages 53-70, February.
    2. Dimitris Georgarakos & Roman Inderst, 2011. "Financial Advice and Stock Market Participation," BCL working papers 51, Central Bank of Luxembourg.
    3. Dudley, Evan & Zhang, Ning, 2016. "Trust and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 363-387.
    4. Pevzner, Mikhail & Xie, Fei & Xin, Xiangang, 2015. "When firms talk, do investors listen? The role of trust in stock market reactions to corporate earnings announcements," Journal of Financial Economics, Elsevier, vol. 117(1), pages 190-223.
    5. Yann Algan & Pierre Cahuc, 2014. "Trust, Well-Being and Growth: New Evidence and Policy Implications," Post-Print hal-01169659, HAL.
    6. Peng Huang & Yue Lu & Robert Faff, 2021. "Social trust and the speed of corporate leverage adjustment: evidence from around the globe," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3261-3303, June.
    7. 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.
    8. Shen, Zhe & Sowahfio Sowah, Joseph & Li, Shan, 2022. "Societal trust and corporate risk-taking: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    9. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    10. Tian, Yonggang & Ang, James S. & Fu, Panpan & Ma, Chaoqun & Wang, Xiuhua, 2024. "Does social trust mitigate insiders' opportunistic behaviors? Evidence from insider trading," Global Finance Journal, Elsevier, vol. 59(C).
    11. Algan, Yann & Cahuc, Pierre, 2014. "Trust, Growth, and Well-Being: New Evidence and Policy Implications," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 2, pages 49-120, Elsevier.
    12. Limbach, Peter & Rau, P. Raghavendra & Schürmann, Henrik, 2023. "The decline of trust across the U.S. finance industry," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 324-344.
    13. Ho, Kung-Cheng & Yen, Huang-Ping & Gu, Yan & Shi, Lisi, 2020. "Does societal trust make firms more trustworthy?," Emerging Markets Review, Elsevier, vol. 42(C).
    14. Chauhan, Yogesh & Jaiswall, Manju & Goyal, Vinay, 2022. "Does societal trust affect corporate capital structure?," Emerging Markets Review, Elsevier, vol. 51(PA).
    15. C. E. Jager, 2017. "A Question of Trust: the Pursuit of Consumer Trust in the Financial Sector by Means of EU Legislation," Journal of Consumer Policy, Springer, vol. 40(1), pages 25-49, March.
    16. Kiridaran Kanagaretnam & Jimmy Lee & Chee Yeow Lim & Gerald Lobo, 2018. "Societal trust and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 23(4), pages 1588-1628, December.
    17. Yann Algan & Pierre Cahuc, 2014. "Trust, Well-Being and Growth: New Evidence and Policy Implications," Post-Print hal-01169659, HAL.
    18. Kuo, Nan-Ting & Lee, Cheng-Few, 2024. "Social trust and the choices to provide audited financial statements by private firms in emerging markets," The British Accounting Review, Elsevier, vol. 56(2).
    19. Shi, Lisi & Ho, Kung-Cheng & Liu, Ming-Yu, 2023. "Does societal trust make managers more trustworthy?," International Review of Financial Analysis, Elsevier, vol. 86(C).
    20. Drobetz, Wolfgang & Mönkemeyer, Marwin & Requejo, Ignacio & Schröder, Henning, 2023. "Foreign bias in institutional portfolio allocation: The role of social trust," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 233-269.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lmu:muenar:20109. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tamilla Benkelberg (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.