Inconsistent Disclosures

81 Pages Posted: 15 Mar 2021 Last revised: 8 Oct 2021

See all articles by Yichang Liu

Yichang Liu

University of Minnesota - Twin Cities

Joshua Madsen

University of Minnesota - Twin Cities - Carlson School of Management

Frank Zhou

University of Pennsylvania - The Wharton School

Date Written: October 7, 2021

Abstract

Recent SEC regulations mandate that hedge fund advisers provide narrative disclosures of their business and operations. We find that 40% of these disclosures contain plausible inconsistencies regarding advisers' regulatory histories, conflicts of interest (COIs), and risks. Inconsistencies are associated with predictably lower performance and thus reflect omissions of likely material information. Inconsistent funds do not differ in their fund flows, flow-performance relation, leverage, ownership structure, or management fees, and thus appear to benefit by de-emphasizing fund problems and misleading attention-constrained market participants. Our study shows that inconsistencies represent a valuable signal largely ignored by even "sophisticated'' investors and highlights the need for regulatory review to reduce misleading disclosures.

Keywords: Inconsistent disclosure, financial regulation, hedge funds, Form ADV, limited attention, public information

JEL Classification: G20, G23, G28, M41, M48

Suggested Citation

Liu, Yichang and Madsen, Joshua and Zhou, Frank, Inconsistent Disclosures (October 7, 2021). Available at SSRN: https://ssrn.com/abstract=3803729 or http://dx.doi.org/10.2139/ssrn.3803729

Yichang Liu

University of Minnesota - Twin Cities ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Joshua Madsen (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Frank Zhou

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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