Skin in the Game versus Skimming the Game: Governance, Share Restrictions, and Insider Flows

51 Pages Posted: 15 Mar 2011 Last revised: 3 Feb 2014

Gideon Ozik

EDHEC Business School

Ronnie Sadka

Boston College - Carroll School of Management

Date Written: February 2, 2014

Abstract

Share restrictions in the hedge-fund industry are often introduced as means of protecting the common interest of investors. Yet, this paper advances that such restrictions induce information asymmetry between managers and their clients about future fund flows. Fund flows, in turn, predict future fund returns for share-restricted funds, especially among funds with low levels of governance and funds managing insiders' wealth, providing managers incentive to trade in advance of their clients. Some direct evidence for such managerial action are presented, as well as additional consistent evidence from the flows of funds within the same family. The evidence suggest that private information about a fund, not only about the fundamental value of its assets, may constitute material information. Such private information engenders potential conflict of interest between fund managers and investors, with implications for proper fund governance and disclosure policy concerning managerial actions.

Keywords: Hedge funds; Governance; Fund flows; Inside information; Asset pricing

JEL Classification: G12, G14, G23, G34

Suggested Citation

Ozik, Gideon and Sadka, Ronnie, Skin in the Game versus Skimming the Game: Governance, Share Restrictions, and Insider Flows (February 2, 2014). Forthcoming, Journal of Financial and Quantitative Analysis. Available at SSRN: https://ssrn.com/abstract=1786002 or http://dx.doi.org/10.2139/ssrn.1786002

Gideon Ozik

EDHEC Business School ( email )

Nice
France

Ronnie Sadka (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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