Trust and delegation

Stephen Brown (), William Goetzmann, Bing Liang and Christopher Schwarz

Journal of Financial Economics, 2012, vol. 103, issue 2, 221-234

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.

Keywords: Hedge funds; Operational risk; Due diligence; Selection bias; Canonical correlation analysis (search for similar items in EconPapers)
JEL-codes: G23 G32 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X11002145
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Trust and Delegation (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:103:y:2012:i:2:p:221-234

DOI: 10.1016/j.jfineco.2011.09.004

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().