Trust and delegation

Stephen Jeffrey Brown, William N Goetzmann, Christopher Schwarz

Research output: Contribution to journalArticleResearchpeer-review

52 Citations (Scopus)


This paper studies operational risk in the hedge fund industry using due diligence reports. Many funds suffer from operational problems, including limited disclosure of legal and regulatory issues. We use direct evidence of inadequate or failed internal processes to derive a canonical correlation-based measure for operational risk consistent with the Basel definition. It controls for selection bias using an extension of Heckman s (1979) procedure. Operational risk increases the likelihood of subsequent poor performance and fund disappearance, but does not influence investors? return-chasing behavior. Our study emphasizes the importance of information verification in the context of financial intermediation.
Original languageEnglish
Pages (from-to)221 - 234
Number of pages14
JournalJournal of Financial Economics
Issue number2
Publication statusPublished - 2012
Externally publishedYes

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