Hedge Fund Boards and the Market for Independent Directors

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Abstract

We provide the first examination of hedge fund boards and their directors. The majority of directorships are held by extremely busy independent directors. These directors are sought by funds because they have more reputational capital at stake, making them independent and credible monitors whose presence can certify fund quality to investors. Busy independent directors are more likely to be hired by high-quality funds, and their departure from the board is associated with investor withdrawals. Moreover, funds with busy independent directors are less likely to commit fraud, abuse discretionary liquidity restrictions, or engage in performance-based risk shifting.

Original languageEnglish
Pages (from-to)2067-2101
Number of pages35
JournalJournal of Financial and Quantitative Analysis
Volume53
Issue number5
DOIs
StatePublished - Oct 1 2018

Bibliographical note

Funding Information:
Clifford Christopher P. Ellis Jesse A. Gerken William C. * 1 * Clifford, chris.clifford@uky.edu , Gerken, will.gerken@uky.edu , University of Kentucky Gatton College of Business and Economics; Ellis (corresponding author), jaellis5@ncsu.edu , North Carolina State University Poole College of Management. 1 We thank seminar participants at the 2014 Conference on Professional Asset Management, the 2014 Mid-Atlantic Research Conference, the 2014 Recent Advances in Mutual Fund and Hedge Fund Research, the 2014 Symposium on Hedge Funds and Regulation at SUNY Albany, Miami University, Texas Christian University, University of Kentucky, University of Tennessee, West Virginia University, Wilfrid Laurier University, and University of North Carolina at Charlotte. We thank Vikas Agarwal, George Aragon, Douglas Cumming (the referee), Naveen Daniel (discussant), Diane Del Guercio, Stephen Dimmock, Jarrad Harford (the editor), Russell Jame, Petri Jylha (discussant), David Mauer, Shawn Mobbs, Louis Piccotti (discussant), Martin Schmalz, Chris Schwarz (discussant), Shawn Thomas, Mark Walker, and Richard Warr for their comments. We would like to especially thank Gary Linford, Don Seymour, Darren Stainrod, and Alan Tooker for providing institutional detail. Gerken acknowledges the support of the John H. Schnatter Institute for the Study of Free Enterprise. We thank Nathaniel Graham, Xin Hong, Qiping Huang, and Emma Xu for research assistance. 14 09 2018 10 2018 53 5 2067 2101 Copyright © Michael G. Foster School of Business, University of Washington 2018  2018 Michael G. Foster School of Business, University of Washington We provide the first examination of hedge fund boards and their directors. The majority of directorships are held by extremely busy independent directors. These directors are sought by funds because they have more reputational capital at stake, making them independent and credible monitors whose presence can certify fund quality to investors. Busy independent directors are more likely to be hired by high-quality funds, and their departure from the board is associated with investor withdrawals. Moreover, funds with busy independent directors are less likely to commit fraud, abuse discretionary liquidity restrictions, or engage in performance-based risk shifting. pdf S0022109018000352a.pdf

Publisher Copyright:
Copyright © Michael G. Foster School of Business, University of Washington 2018.

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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