Trust and delegation

Stephen J. Brown; William Goetzmann; Bing Liang; Christopher G. Schwarz

doi:10.1016/j.jfineco.2011.09.004

Journal of Financial Economics Vol. 103 No. 2 2012

Trust and delegation

Stephen J. Brown^1,2; William Goetzmann³; Bing Liang⁴; Christopher G. Schwarz⁵

¹ New York University · ² The University of Melbourne · ³ Yale University · ⁴ The Isenberg School of Management, University of Massachusetts, USA · ⁵ University of California, Irvine

Abstract

This paper studies operational risk in the hedge fund industry using due diligence reports. Many funds suffer from operational problems, including limited disclosure of legal and regulatory issues. We use direct evidence of inadequate or failed internal processes to derive a canonical correlation-based measure for operational risk consistent with the Basel definition. It controls for selection bias using an extension of Heckman's (1979) procedure. Operational risk increases the likelihood of subsequent poor performance and fund disappearance, but does not influence investors’ return-chasing behavior. Our study emphasizes the importance of information verification in the context of financial intermediation.

DOI: 10.1016/j.jfineco.2011.09.004
Volume: 103
Issue: 2
Pages: 221-234
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Trust and delegation

Abstract

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