Predicting Fraud by Investment Managers

Gerken, William Christopher; Dimmock, Stephen G.

doi:10.2139/ssrn.1832770

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Predicting Fraud by Investment Managers

Networks Financial Institute Working Paper No. 2011-WP-09

47 Pages Posted: 9 May 2011 Last revised: 8 Aug 2011

See all articles by William Christopher Gerken

Stephen G. Dimmock

National University of Singapore; Asian Bureau of Finance and Economic Research (ABFER)

Date Written: August 7, 2011

Abstract

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.

Keywords: Fraud, Investment Fraud, Operational Risk, SEC, Disclosure, Form ADV

JEL Classification: G2, G20, G28, K2, K22

Suggested Citation: Suggested Citation

Gerken, William Christopher and Dimmock, Stephen G., Predicting Fraud by Investment Managers (August 7, 2011). Networks Financial Institute Working Paper No. 2011-WP-09, Available at SSRN: https://ssrn.com/abstract=1832770 or http://dx.doi.org/10.2139/ssrn.1832770