Hedge Fund Regulation and Fund Governance: Evidence on the Effects of Mandatory Disclosure Rules

Abstract

Regulations often cause concurrent changes to both disclosure and enforcement, meaning that companies will be subject to different disclosure requirements and to a different likelihood of being penalized for any infractions. Because these changes are implemented concurrently, it is difficult to determine how each factor affects the outcomes of the regulation. Recent US hedge fund regulation provides a unique setting to examine this question because, among the funds affected by the mandatory regulation, some were only subject to disclosure requirements, some only to increased enforcement, and others to both disclosure and increased enforcement. Using three shocks that caused hedge funds to be regulated, then deregulated, and then regulated again, I first document that mandatory hedge fund regulation as a whole reduces misreporting. Then, more relevant to my research question, I find that the decrease in misreporting is driven by the mandatory disclosure portion of the regulation.