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

Dichu Bao, Jong Hag Choi, Byoung Uk Kang, Woo Jong Lee

Research output: Journal article publicationJournal articleAcademic researchpeer-review

Abstract

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.

Original languageEnglish
Pages (from-to)23-43
Number of pages21
JournalAccounting Horizons
Volume35
Issue number4
DOIs
Publication statusPublished - Dec 2021

Keywords

  • Fund capital flows
  • Hedge funds
  • Incentive and management fees
  • Voluntary audit

ASJC Scopus subject areas

  • Accounting

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