1. ¹Schulich School of Business, York University, Toronto, Canada
2. ²Center for Financial Studies, Goethe-Universität Frankfurt/Main, Frankfurt, Germany

Correspondence: D Cumming, York University – Schulich School of Business, 4700 Keele Street, Toronto, Ontario M3J 1P3, Canada. Tel: +1 416 736 2100 ext 77942; Fax: +1 416 736 5687; E-mail: DCumming@schulich.yorku.ca

Received 14 February 2008; Revised 13 February 2009; Accepted 31 March 2009; Published online 17 September 2009.

Abstract

To obtain more funds from the institutional investors, private equity (PE) fund managers may report inflated valuations of private investee companies that are not yet sold. However, such overvaluations may result in a reputational cost when those investments are realized. Using evidence from 39 countries, we show that there are significant systematic biases in managers' reporting of fund performance. We find that these biases depend on the accounting and legal environment in a country, and on proxies for the degree of information asymmetry between institutional investors and PE fund managers.