Trust and delegation |
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Authors: | Stephen Brown William Goetzmann |
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Affiliation: | a New York University, Stern School of Business, USA b University of Melbourne, Australia c The Yale School of Management, USA d The Isenberg School of Management, University of Massachusetts, USA e University of California at Irvine, USA |
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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. |
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Keywords: | G23 G32 |
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