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Regulatory Oversight and Return Misreporting by Hedge Funds

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  • Stephen G. Dimmock
  • William C. Gerken

Abstract

We use Securities and Exchange Commission (SEC) rule changes to show that regulatory oversight reduces return misreporting by hedge funds. Specifically, we use a 2004 rule change that expanded SEC oversight of hedge funds and the 2006 revocation of this rule. Differences-in-differences tests show that, following the rule change, misreporting by newly regulated funds decreased. After revocation, funds that exited the regulatory system increased misreporting relative to funds that remained registered. Placebo tests show no change in misreporting by foreign funds exempt from the rule change. We show that regulatory oversight increased the level of flows and decreased the sensitivity of flows to underperformance.

Suggested Citation

  • Stephen G. Dimmock & William C. Gerken, 2016. "Regulatory Oversight and Return Misreporting by Hedge Funds," Review of Finance, European Finance Association, vol. 20(2), pages 795-821.
    • Handle: RePEc:oup:revfin:v:20:y:2016:i:2:p:795-821.
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    File URL: http://hdl.handle.net/10.1093/rof/rfv025
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    References listed on IDEAS

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    1. Mariassunta Giannetti & Tracy Yue Wang, 2016. "Corporate Scandals and Household Stock Market Participation," Journal of Finance, American Finance Association, vol. 71(6), pages 2591-2636, December.
    2. Puhani, Patrick A., 2012. "The treatment effect, the cross difference, and the interaction term in nonlinear “difference-in-differences” models," Economics Letters, Elsevier, vol. 115(1), pages 85-87.
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    Cited by:

    1. David Xiao, 2024. "Hedge Fund Index Rules and Construction," Papers 2403.15925, arXiv.org.
    2. Colleen Honigsberg, 2019. "Hedge Fund Regulation and Fund Governance: Evidence on the Effects of Mandatory Disclosure Rules," Journal of Accounting Research, Wiley Blackwell, vol. 57(4), pages 845-888, September.
    3. Cumming, Douglas & Ji, Shan & Peter, Rejo & Tarsalewska, Monika, 2020. "Market manipulation and innovation," Journal of Banking & Finance, Elsevier, vol. 120(C).
    4. Lee, David, 2024. "Hedge Fund Investment Returns and Performance," MPRA Paper 120350, University Library of Munich, Germany.

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