Research

I study whether trust in cultural institutions affects stock market participation. Cultural

institutions (e.g., religions) shape individuals’ beliefs on trust and cooperation (“social capital”). Institutional scandals influence these beliefs, which are central to equity ownership. I employ the U.S. Catholic clergy abuse crisis from 2002 to 2005 as a shock to trust in local Catholic Churches. In a stacked regression design, impacted Catholic households decrease their equity participation by 3.3 p.p. (over 10%). These households exhibit behavior consistent with decreased cooperation with outsiders (e.g., increased fertility, lower income). Cross sectional tests point to greater financially vulnerability for affected households.

We propose a construct, the Trust Triangle, that highlights three primary mechanisms that provide ex post accountability for opportunistic behavior and motivate ex ante trust in economic relationships. The mechanisms are (i) a society’s legal and regulatory framework, (ii) market-based discipline and reputational capital, and (iii) culture, including individual ethics and social norms. The Trust Triangle provides a framework to conceptualize the relationships between trust, corporate accountability, legal liability, reputation, and culture.

Financial reporting fraud and other forms of financial reporting misconduct are a significant threat to the existence and efficiency of capital markets. This study reviews the literature on financial reporting misconduct from the perspectives of law, accounting, and finance. Our goals are to establish a common language for researchers interested in this line of research, describe the main findings and challenges in these literatures, and provide directions for future research. Although research on financial reporting misconduct faces challenges, those challenges provide significant opportunities to advance the literature, as the answers to many questions on financial reporting misconduct remain unsettled.