Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration






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    • Stephen Brown is the David S. Loeb Professor of Finance at New York University Stern School of Business; William Goetzmann is the Edwin J. Beinecke Professor of Finance and Management, Yale School of Management; Bing Liang is Professor of Finance, Isenberg School of Management, University of Massachusetts; and Christopher Schwarz is Assistant Professor of Finance, University of California at Irvine. We acknowledge the very extensive comments of the editor and referee, and thank Yong Chen; Mila Getmansky; Thomas Fraser; and seminar participants at Babson College, the CISDM 2006 Annual Conference, Erasmus University, the 2006 European Finance Association Meetings, Hong Kong University of Science and Technology, the 2007 INQUIRE Spring Seminar, Lancaster University, London Business School, Massey University, Monash University, National Sun Yat-Sen University, the New York Stock Exchange, the 9th Conference of the European Central Bank—Centre for Financial Studies Research Network 2007, Oxford University, Rutgers University, Singapore Management University, the 20th Australasian Finance & Banking Conference 2007, the University of Massachusetts at Amherst, the University of Melbourne, the University of North Carolina, the University of Sydney, the University of Vienna, and the 2007 Western Finance Association Meetings for useful comments. While this research was supported in part by a grant from INQUIRE UK and a grant from the BSI Gamma Foundation, it does not necessarily reflect the views of either organization.


Mandatory disclosure is a regulatory tool intended to allow market participants to assess operational risk. We examine the value of disclosure through the controversial SEC requirement, since overturned, which required major hedge funds to register as investment advisors and file Form ADV disclosures. Leverage and ownership structures suggest that lenders and equity investors were already aware of operational risk. However, operational risk does not mediate flow-performance relationships. Investors either lack this information or regard it as immaterial. These findings suggest that regulators should account for the endogenous production of information and the marginal benefit of disclosure to different investment clienteles.