Do private equity funds manipulate reported returns?

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