Predicting Fraud by Investment Managers
William Christopher Gerken
University of Kentucky - Finance
Stephen G. Dimmock
Nanyang Technological University - Division of Finance
August 7, 2011
Networks Financial Institute Working Paper No. 2011-WP-09
We test the predictability of investment fraud using a panel of mandatory disclosures filed with the SEC. We find that disclosures related to past regulatory and legal violations, conflicts of interest, and monitoring have significant power to predict fraud. Avoiding the 5% of firms with the highest ex ante predicted fraud risk would allow an investor to avoid 29% of fraud cases and over 40% of the total dollar losses from fraud. We find no evidence that investors receive compensation for fraud risk through superior performance or lower fees. We examine the barriers to implementing fraud prediction models and suggest changes to the SEC's data access policies that could benefit investors.
Number of Pages in PDF File: 47
Keywords: Fraud, Investment Fraud, Operational Risk, SEC, Disclosure, Form ADV
JEL Classification: G2, G20, G28, K2, K22
Date posted: May 9, 2011 ; Last revised: August 8, 2011
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.312 seconds