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The Effect of External Audits: Evidence from Voluntary Audits of Hedge Funds

journal contribution
posted on 2021-02-23, 00:00 authored by Dichu Bao, J H Choi, B U Kang, W J Lee
SYNOPSIS
Using the setting of hedge funds, we document two important merits of external audits. We find that incentive fee rates (i.e., performance-based compensation to fund managers) are higher for audited funds than for unaudited funds. In contrast, management fee rates (i.e., fund-size-based compensation to fund managers) do not differ depending on audit status. We also find some evidence that audited funds attract more capital inflows from investors than unaudited funds do after funds report high performance. Our findings indicate that hedge fund investors appreciate the value of external audits.

History

Journal

Accounting Horizons

Volume

35

Issue

4

Pagination

23 - 43

Publisher

American Accounting Association

Location

Lakewood Ranch, Florida

ISSN

0888-7993

eISSN

1558-7975

Language

English

Publication classification

C1 Refereed article in a scholarly journal