Private Equity and Financial Adviser Misconduct

50 Pages Posted: 30 Dec 2021

See all articles by Albert Sheen

Albert Sheen

University of Oregon - Department of Finance

Youchang Wu

University of Oregon - Lundquist College of Business

Yuwen Yuan

University of Oregon

Date Written: December 30, 2021

Abstract

Does ownership by private equity firms encourage or deter financial misconduct? We examine this issue by analyzing the records of individual financial advisers around buyouts of investment advisory firms by private equity. Our estimates suggest that private equity ownership leads to an increase of 147% in the percentage of the acquired firm's financial advisers committing misconduct. While the misconduct rate of the acquired firms is only about 40% of the industry average before the buyout, it becomes on par with the industry average after the buyout. Within-adviser variation accounts for 89% of the increase in the adviser's misconduct probability. The increase in misconduct is stronger in firms with higher post-buyout growth in assets under management per adviser and is concentrated in firms whose clients include retail customers. Our results suggest a tension between advisory firms' profit motive and ethical business practices, especially when customers are financially unsophisticated.

Keywords: Financial adviser, financial misconduct, private equity, asset management, fraud, ethics

JEL Classification: G11, G20, G23

Suggested Citation

Sheen, Albert and Wu, Youchang and Yuan, Yuwen, Private Equity and Financial Adviser Misconduct (December 30, 2021). Available at SSRN: https://ssrn.com/abstract=3986875 or http://dx.doi.org/10.2139/ssrn.3986875

Albert Sheen

University of Oregon - Department of Finance ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Youchang Wu (Contact Author)

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

HOME PAGE: http://www.youchangwu.com

Yuwen Yuan

University of Oregon ( email )

Eugene, OR
United States

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