Shaking the Faith: Global Frauds and Trust in Capital Markets

TitleShaking the Faith: Global Frauds and Trust in Capital Markets
Publication TypeUnpublished
AuthorsAbramova, I, Gipper, B, Su, X
Keywordsanalysts, auditors, capital market participation, corporate earnings announcement, corporate scandals, earnings credibility, enforcement, financial misconduct, gatekeepers, investor protections, trust

We examine whether revelations of financial misconduct invariably lead to negative market
spillovers in a global setting. We integrate data on societal trust from the World Values Survey, accounting scandal data from Hail, Tahoun, and Wang (2018), household stock market participation data, and volume and stock price reactions to earnings reports. Our findings reveal a disparity in how investors adjust their views on the stock market between high- and low-trust environments. In high-trust markets, investors tend to lose confidence in the capital markets during high-scandal periods, as evidenced by reduced market participation, lower abnormal trading volume, and lower earnings response coefficients (ERCs). Conversely, in low-trust markets, investors increase their market participation, abnormal trading volume, and ERCs. Adjustments in trust towards gatekeepers appear to contribute to the disparity. High-trust markets exhibit a notable decline in investor confidence towards analysts, scandal-implicated auditors, and institutions responsible for investor protection following scandals. On the contrary, in low-trust markets, financial scandals appear to enhance investor confidence in Big 4 auditors and institutions enforcing investor protection.

Citation Key14039