Misconduct and Market Implications of Honest Advisors’ Decisions

52 Pages Posted: 9 Nov 2022 Last revised: 24 Dec 2022

See all articles by Michael Gelman

Michael Gelman

Alfred Lerner College of Business and Economics, The University of Delaware

Amir Shoham

Temple University - Department of Finance

Date Written: October 30, 2022

Abstract

Previous literature has studied the factors that influence investment advisor misconduct. However, most advisors have not engaged in misconduct. We establish that advisors with clean records are likely to leave firms that exhibit increased misconduct to firms with fewer occurrences. This decision of honest advisors has important market implications, affecting the flow of AUM and the matching between firms and advisors in relation to misconduct. We demonstrate that in an industry where reputation and trust are central, being affiliated with a firm that experiences misconduct elevates reputational concerns and threatens future cash flows. Changes in local economic conditions, the firms' responses, changes in enforcement, or competing firms reaching out to the advisors do not drive honest advisors' decisions to leave. Further, we perform instrumental variable and diff-in-diff analyses to estimate a firm's misconduct occurrences.

Keywords: Financial Misconduct, Investment advisor, Separations, Reputation

JEL Classification: D14, D18, G20, G24, G38, J44, K42, L22, M53

Suggested Citation

Gelman, Michael and Shoham, Amir, Misconduct and Market Implications of Honest Advisors’ Decisions (October 30, 2022). Available at SSRN: https://ssrn.com/abstract=4262393 or http://dx.doi.org/10.2139/ssrn.4262393

Michael Gelman (Contact Author)

Alfred Lerner College of Business and Economics, The University of Delaware ( email )

20 Orchard Rd
United States

Amir Shoham

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

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