Joseph D. Farizo

Misconduct and Fraud by Investment Managers Corruption and Fraud in Financial Markets: Malpractice, Miscon- duct and Manipulation

With Steve Dimmock & Will Gerken

We document the prevalence and variety of frauds committed by investment managers. We show that prior legal and regulatory violations, conflicts-of-interest, and monitoring disclosures available via the Security and Exchange Commission’s Form ADV are useful for predicting fraud. Additional tests show that fraud by rogue employees is more predictable than firm-wide fraud, but both types of fraud are significantly predictable. We revisit the fraud prediction model of Dimmock and Gerken (2012) and test its performance out-of-sample (using fraud cases discovered since that article’s publication). We find the model has significant predictive power for the out-of-sample cases. To encourage additional research in this area, we have made the data used in this chapter publicly available at https://doi.org/10.13023/nsjd-rk62.


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(Black)Rock the Vote: Index Funds and Opposition to Management Work in Progress

The rapid rise in indexed investing has led to fears that these “passive” funds will refrain from meaningful governance of their portfolio companies. However, I find index funds do participate in monitoring by voting their proxy shares against management as much as, and frequently more than, actively managed funds. To rule out the possibility that index funds blindly follow the voting behavior of active fund managers or proxy advisors, I examine how index funds vote within proposals at companies their fund family does not hold in its active funds. I find that index funds are more likely to oppose management on these “index-only” shares. Further, I demonstrate that index fund opposition has an incremental effect on whether a proposal passes. These collective findings are consistent with index funds fulfilling their fiduciary duty to their investors, in part alleviating concerns that the growth of indexed investing is necessarily bad for corporate governance.


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Divergence in Mutual Fund Voting Work in Progress


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