Predicting fraud by investment managers

Abstract

We test the predictability of investment fraud using a panel of mandatory disclosures filed with the U.S. Securities and Exchange Commission (SEC). We show that past regulatory and legal violations, conflicts of interest, and monitoring have significant power to predict fraud. Avoiding the 5% of firms with the highest ex ante predicted fraud risk would allow an investor to avoid 29% of fraud cases and over 40% of the total dollar losses from fraud. We examine the ability of investors to implement fraud prediction models based on the disclosure filings, and suggest changes in SEC data access policies that could benefit investors.

When and Why Do Takeovers Lead to Fraud?

“…However, we consider corporate misbehavior as a dependent variable rather than as an exogenous event. In this sense, our approach is similar to Dimmock and Gerken () who identify a set of factors that predict future fraud by asset managers. We extend this work by focusing on fraud at corporations and provide an additional potential determinant of fraud, the transfer of relatively small controlling stakes.…”

Sensation Seeking and Hedge Funds

“…Moreover, performance car owners exhibit higher ω-Scores, a univariate measure of operational risk exposure (Brown et al (2009)). These results suggest that sensation-seeking managers may be more predisposed to fraud (Dimmock and Gerken (2012)).…”

“…This paper also deepens our understanding of the sources of hedge fund operational risk. Work in this area has focused on assessing operational risk and its impact (Brown et al (2008(Brown et al ( , 2009(Brown et al ( , 2012) or predicting hedge fund fraud, a particular type of operational risk (Dimmock and Gerken (2012) and Bollen and Pool (2012)). We show that innate personality traits such as sensation seeking can have implications for operational risk.…”

Corporate fraud culture: Re‐examining the corporate governance and performance relation

“…First, it is reasonable to assume that a firm with a significant corporate culture of fraud that jeopardises its financial performance will also experience a higher rate of both major and minor fraud occurrences (Dimmock and Gerken, 2012). If the probability of fraud detection is assumed to be fixed across firms, then an arbitrary criterion can be implemented to identify firms more or less vulnerable to a significant corporate culture of fraud.…”