Working Paper: CEPR ID: DP8898
Authors: Andrew J. Patton; Tarun Ramadorai; Michael Streatfield
Abstract: We analyze the reliability of voluntary disclosures of financial information, focusing on widely-employed publicly available hedge fund databases. Tracking changes to statements of historical performance recorded at different points in time between 2007 and 2011, we find that historical returns are routinely revised. These revisions are not merely random or corrections of earlier mistakes; they are partly forecastable by fund characteristics. Moreover, funds that revise their performance histories significantly and predictably underperform those that have never revised, suggesting that unreliable disclosures constitute a valuable source of information for current and potential investors. These results speak to current debates about mandatory disclosures by financial institutions to market regulators.
Keywords: Asymmetric Information; Disclosure; Finance; Regulation; Hedge Funds; Performance
JEL Codes: D82; G14; G23; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unreliable disclosures (Y50) | negative signal to investors (G19) |
| historical returns of hedge funds are revised (G14) | likelihood of performance revisions (C53) |
| fund characteristics (size, volatility, liquidity) (G15) | likelihood of performance revisions (C53) |
| larger, more volatile, less liquid funds (G23) | likelihood of performance revisions (C53) |
| revisions of performance histories (E01) | future performance outcomes (L25) |