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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/28309
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| Title: | Trust and Delegation |
| Authors: | Brown, Stephen J.
Liang, Bing
Goetzmann, William N
Schwarz, Christopher |
| Issue Date: | 17-Aug-2009 |
| Series/Report no.: | FIN-09-016 |
| Abstract: | Due to imperfect transparency and costly auditing, trust is an essential
component of financial intermediation. In this paper we study a
comprehensive sample of due diligence reports from a major hedge fund
due diligence firm. A routine feature of due diligence is an assessment
of integrity. We find that misrepresentation about past legal and
regulatory problems is frequent (21%), as is incorrect or unverifiable
representations about other topics (28%). Misrepresentation, the failure
to use a major auditing firm and the use of internal pricing are
significantly related to legal and regulatory problems, indices of
operational risk. Due diligence (DD) reports are costly and are only
performed when a fund is seriously considered for investment. It is
important to control for this conditioning which would otherwise bias
cross-sectional analysis. We find that DD reports are typically issued
on high return funds three months after the historical performance has
peaked. DD reports are also issued at the point of highest cash flow
into the fund. This pattern is consistent with return chasing behavior
by institutional hedge fund investors. |
| URI: | http://hdl.handle.net/2451/28309 |
| Appears in Collections: | Finance Working Papers
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