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Resisting the Manipulation of Performance
Metrics: An Empirical Analysis of The
Manipulation-Proof Performance Measure

59 Pages Posted: 15 Jan 2010  

Stephen J. Brown

New York University - Stern School of Business

MaengSoo Kang

Sogang Business School

Francis Haeuck In

Monash University - Department of Accounting; Financial Research Network (FIRN)

Gunhee Lee

Sogang Business School

Date Written: January 13, 2010

Abstract

Performance manipulation can make a fund more attractive to investors and, more seriously, managers can intentionally misreport returns to enhance performance scores. This paper empirically investigates whether the manipulation-proof performance measure derived by Goetzmann et al. (2007) really is impervious to performance anipulation, using TASS hedge fund data, which have very skewed and fat-tailed return distributions. This article determines that the MPPM can evaluate performance more correctly than other measures. At application level, we propose the Doubt Ratio (DR), a new simple measure to detect funds that might have been manipulated or whose returns were intentionally smoothed, as in Madoff’s case. Our findings will help investors select funds and financial supervisors filter out funds for further investigation.

Keywords: Performance Measure, Performance Manipulation, Return Smoothing, Doubt Ratio, Madoff

JEL Classification: C10, G10, G20

Suggested Citation

Brown, Stephen J. and Kang, MaengSoo and In, Francis Haeuck and Lee, Gunhee, Resisting the Manipulation of Performance Metrics: An Empirical Analysis of The Manipulation-Proof Performance Measure (January 13, 2010). Finance and Corporate Governance Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1536323 or http://dx.doi.org/10.2139/ssrn.1536323

Stephen Brown

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0306 (Phone)
212-995-4233 (Fax)

MaengSoo Kang

Sogang Business School ( email )

Seoul 121-742
Korea, Republic of (South Korea)

Francis In (Contact Author)

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia
+61 3 9905 1561 (Phone)
+61 3 9905 5475 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Gunhee Lee

Sogang Business School ( email )

Seoul 121-742
Korea, Republic of (South Korea)

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