Trust shock spillover : risk perception, salience, and information disclosure

Abstract

Trust drives the majority of clients investment behavior, but there is little research to quantify trust influence on client investment and investigate mechanism of trust shock on investment. By utilizing the geographic dispersion of the default amount of a public trust shock event in China’s trust industry, this paper analyzes the trust shock spillover effect and the transmission channels on the indirect clients’ investment. We show that the clients in areas that were more exposed to the event withdrew more assets from trust products, and trust influences the behavior of these indirect clients through channels like alteration of risk perception and salient news in local regions. Evidence suggests that clients withdraw more assets from risker products, and clients who lived in provinces that is closer to event place, or in provinces where the event received more internet attention, experienced higher withdrawals. Furthermore, we check information disclosure as remedy choice after the trust shock and find that products with more transparent information disclosures had fewer withdrawals. Client survey in our paper also shows that more frequent information disclosure can improve client investment intention. In addition, our paper shows client investment withdrawals are heterogenous, depending on client characteristics like income resource, gender, risk tolerance, and it finds the clients with income from salary, female clients, and client with lower risk tolerance level are more heavily influenced. The trust shock spillover heterogeneity also depends on whether there is local wealth center coverage or service from financial advisers in clients area. Clients in provinces with local wealth centers and with financial advisor coverage suffered less. Our findings suggest that regulators should improve information transparency, effective media response, requirement on qualified investor and local service for wealth clients, to prepare for trust shock spillover risk into the whole financial system, which is especially meaningful for China’s trust industry, a crucial aspect of China’s shadow banking.