Trust and Delegation

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

No 15529, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Due to imperfect transparency and costly auditing, trust is an essential component of financial intermediation. In this paper we study a sample of 444 due diligence (DD) reports from a major hedge fund DD 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. We find that DD reports are typically performed after positive performance and investor inflows. We control for potential bias due to this and other potential conditioning. An operational risk score based on information contained in the DD reports significantly predicts subsequent fund failure and statistical performance characteristics out of sample. Finally we find that observed operational risk characteristics do not appear to moderate fund flow.

JEL-codes: G2 K2 (search for similar items in EconPapers)
Date: 2009-11
Note: LE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Brown, Stephen & Goetzmann, William & Liang, Bing & Schwarz, Christopher, 2012. "Trust and delegation," Journal of Financial Economics, Elsevier, vol. 103(2), pages 221-234.

Downloads: (external link)
http://www.nber.org/papers/w15529.pdf (application/pdf)

Related works:
Journal Article: Trust and delegation (2012)
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:nbr:nberwo:15529

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w15529

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().