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Do Private Equity Funds Manipulate Reported Returns?

74 Pages Posted: 30 May 2013 Last revised: 7 Jul 2017

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Oleg Gredil

Tulane University -- A.B. Freeman School of Business

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: April 30, 2017

Abstract

Private equity funds hold assets that are hard to value. Managers may have an incentive to distort reported valuations if these are used by investors to decide on commitments to subsequent funds managed by the same firm. Using a large dataset of buyout and venture funds, we test for the presence of reported return manipulation. We find evidence that some underperforming managers inflate reported returns during times when fundraising takes place. However, those managers are less likely to raise a next fund, suggesting that investors can see through the manipulation on average. In contrast, we find that top-performing funds likely understate their valuations. A simple theoretical framework rationalizes our empirical results as well as those of related papers.

Keywords: Private Equity, Venture Capital, Buyout Funds Mutual Funds, Institutional Investors

JEL Classification: G23, G24, G30

Suggested Citation

Brown, Gregory W. and Gredil, Oleg and Kaplan, Steven N., Do Private Equity Funds Manipulate Reported Returns? (April 30, 2017). Journal of Financial Economics (JFE), Forthcoming; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=2271690 or http://dx.doi.org/10.2139/ssrn.2271690

Gregory W. Brown (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Oleg Gredil

Tulane University -- A.B. Freeman School of Business ( email )

7 McAlister Dr
New Orleans, LA 70118
United States

Steven Neil Kaplan

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4513 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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