University at Buffalo School of Management

Autumn 2020 Buffalo Business 23 Hedge fund managers use complicated writing to deceive Take note, inves- tors: An investment strategy filled with confusing language can be a sign of dishonesty, according to research from the School of Management. Published in SSRN, the study found that hedge fund man- agers who use complex writing experi- ence more regulatory actions, report more severe infractions and violate more invest- ment rules. On the other hand, managers with clearer, more expansive vocabularies were more honest and linked to higher returns, outperforming funds with complex write- ups by 3.63% annually. "Convoluted writing can be a sign that a fund manager has something to hide," says Cristian Tiu, associate professor and chair of finance. "They don't want to divulge too much and inadvertently reveal the inconsistencies in their operations." To determine the complexity of hedge fund writing, the researchers evaluated more than 21,000 funds from 1994 to 2016 and analyzed the number of distinct words, grammatical structure, and sentence and paragraph length. The good news, though, is the study found investors tend to put more money into funds with more understandable descriptions than those that are more compli- cated to read. "The richness of the vocabulary used by a portfolio manager provides legitimate insight into their sophistication as an investor," says Tiu. Tiu collaborated on the study with Juha Joenväärä, assistant professor of finance at Aalto University; Jari Karppinen, doctoral student at the University of Oulu; and Melvyn Teo, the Lee Kong Chian Professor of Finance at the Singapore Management University Lee Kong Chian School of Business. Tiu Going overboard? Corporate directors are busy people—but according to investors, they can be too busy. Published in the Journal of Financial and Quantitative Analysis, new School of Management research shows that when directors who serve on multiple boards resign, investors react positively toward the company they le and those that keep them on board. "Sitting on several boards shows these directors are in high demand," says Feng Gu, professor and chair of accounting and law. "But investors may also assume 'busy' directors will be distracted and devote less time to their company." The researchers compiled data from 1996 to 2016 on about 1,500 companies a year. While the average board has shrunk, they found the amount of people who hold multiple board seats has increased from 26.8% to 40% of all directors. Next, they zeroed in on a sample of 314 directors who resigned from a board between 2004 and 2007, when regulations were increasing director responsibilities and investor scrutiny. They discovered that when news broke of a director's resignation, the companies that retained them saw positive cumulative abnormal returns over the next three days. The market reaction was even stronger for directors with specialized expertise, and for smaller companies and firms in risky sectors. "Clearly, investors expected that by resigning, these directors would be freed up to devote more time and attention to corporate governance—and our results indicate they were right," Gu says. The study showed directors increased their involvement and leadership at the retaining firms, and did not seek additional board positions. Gu's co-authors were Keren Bar-Hava of Hebrew University's Jerusalem School of Business Administration and Baruch Lev of NYU's Stern School of Business. Gu Autumn 2020 Buffalo Business 23

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