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Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration

Stephen J. Brown
NYU Stern School of Business

William N. Goetzmann
Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Bing Liang
University of Massachusetts at Amherst - Department of Finance & Operations Management; China Academy of Financial Research (CAFR)

Christopher Schwarz
University of California at Irvine

Journal of Finance, Forthcoming
Yale ICF Working Paper No. 06-15

Abstract:
Mandatory disclosure is a regulatory tool intended to allow market participants to assess operational risk. We examine the value of disclosure through the controversial SEC requirement, since overturned, which required major hedge funds to register as investment advisors and file Form ADV disclosures. Leverage and ownership structures suggest that lenders and equity investors were already aware of operational risk. However, operational risk does not mediate flow-performance relationships. Investors either lack this information or regard it as immaterial. These findings suggest that regulators should account for the endogenous production of information and the marginal benefit of disclosure to different investment clienteles.

Keywords: Hedge funds, operational risk, SEC filing, Form ADV

JEL Classifications: G2, K2

Accepted Paper Series

Date posted: July 21, 2006 ; Last revised: September 11, 2009

Suggested Citation

Brown, Stephen J., Goetzmann, William N., Liang, Bing and Schwarz, Christopher, Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration. Journal of Finance, Forthcoming; Yale ICF Working Paper No. 06-15. Available at SSRN: http://ssrn.com/abstract=918461

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Contact Information

Bing Liang (Contact Author) University of Massachusetts at Amherst - Department of Finance & Operations Management ( email ) Amherst, MA 01003 United States
China Academy of Financial Research (CAFR) 1954 Huashan Road Shanghai P.R.China, 200030 China
Stephen J. Brown NYU Stern School of Business ( email ) Stern School of Business 44 West 4th Street New York, NY 10012-1126 United States 212-998-0306 (Phone) 212-995-4233 (Fax)
William N. Goetzmann Yale School of Management - International Center for Finance ( email ) 135 Prospect Street P.O. Box 208200 New Haven, CT 06520-8200 United States 203-432-5950 (Phone) 203-432-8931 (Fax) HOME PAGE: http://viking.som.yale.edu
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States
Christopher Schwarz University of California at Irvine ( email ) Irvine, CA 92697-3125 United States