Corruption Perceptions and Capital Fragility: Evidence from Hedge Funds Around the World

52 Pages Posted: 6 Aug 2018

See all articles by George O. Aragon

George O. Aragon

Arizona State University (ASU) - Finance Department

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Haibei Zhao

Lehigh University

Date Written: June 28, 2018

Abstract

We find that country-level corruption perceptions influence capital flows to the global hedge fund industry. Hedge funds in high corruption countries exhibit a greater sensitivity of investor outflows to poor fund performance compared to funds in low corruption countries. Corruption perceptions also influence manager behavior and fund policies as indicated by stronger evidence of returns management, tighter contractual restrictions on investor redemptions, and greater managerial investment of personal capital. Our findings suggest that operational risk concerns such as risk of fraud, poor investor protection, and weak legal enforcement associated with corrupt environments generate capital fragility.

Keywords: Corruption, hedge funds, flow-performance, fragility, operational risk

JEL Classification: G15, G23

Suggested Citation

Aragon, George O. and Nanda, Vikram K. and Zhao, Haibei, Corruption Perceptions and Capital Fragility: Evidence from Hedge Funds Around the World (June 28, 2018). Available at SSRN: https://ssrn.com/abstract=3207064 or http://dx.doi.org/10.2139/ssrn.3207064

George O. Aragon (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Haibei Zhao

Lehigh University ( email )

621 Taylor Street, RBC 323
Bethlehem, PA PA 18018
United States

HOME PAGE: http://https://sites.google.com/a/lehigh.edu/haibei/

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