Predicting fraud by investment managers
Dimmock, Stephen G.
Gerken, William Christopher
Date of Issue2012
College of Business (Nanyang Business School)
We test the predictability of investment fraud using a panel of mandatory disclosures filed with the SEC. We find that disclosures related to 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 find no evidence that investors receive compensation for fraud risk through superior performance or lower fees. We examine the barriers to implementing fraud prediction models and suggest changes to the SEC's data access policies that could benefit investors.
Journal of financial economics
© 2012 Elsevier B.V. This is the author created version of a work that has been peer reviewed and accepted for publication by Journal of Financial Economics, Elsevier B.V. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1016/j.jfineco.2012.01.002].