Review of Corporate Finance > Vol 2 > Issue 3

Bias in the Reporting of Venture Capital Performance: The Disciplinary Role of FOIA

Erin E. Smith, Division of Economic and Risk Analysis, U.S. Securities and Exchange Commission, USA, smithe@sec.gov , Janet Kiholm Smith, Robert Day School of Economics and Finance, Claremont McKenna College, USA, janet.smith@claremontmckenna.edu , Richard L. Smith, School of Business, University of California, Riverside, USA, richard.smith@ucr.edu
 
Suggested Citation
Erin E. Smith, Janet Kiholm Smith and Richard L. Smith (2022), "Bias in the Reporting of Venture Capital Performance: The Disciplinary Role of FOIA", Review of Corporate Finance: Vol. 2: No. 3, pp 493-525. http://dx.doi.org/10.1561/114.00000022

Publication Date: 07 Dec 2022
© 2022 E. E. Smith, J. K. Smith and R. L. Smith
 
Subjects
Financial markets: Financial intermediation,  Corporate finance: Corporate financing,  Government programs and public policy,  New business financing: Venture capital and private equity capital
 
Keywords
JEL Codes: G11, G18, G24, G28
Venture Capital performanceFOIAbias in performance reportingentrepreneurial finance
 

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In this article:
Introduction 
The Organization of VC Funds and Performance Reporting 
Hypothesis Development 
Summary Statistics and Preliminary Analysis 
Empirical Analysis 
Summary and Discussion 
References 

Abstract

Using a large sample of fund-years, we investigate the performance reporting behaviors of general partners (GPs) and limited partners (LPs) of Venture Capital (VC) funds. Self-reporting by GPs raises the concern that the information investors rely on may be biased, either due to selective reporting from the most successful funds or from overstated performance. Our results indicate that selective reporting is the more important concern: GPs report irregularly and are more likely to report when LPs report good performance. We estimate that selective reporting by GPs overstates VC fund returns by 4 percentage points. We look specifically at the disciplinary role of FOIA in mitigating distortions in reported performance. FOIA-eligible LPs are 8.5 times more likely to report than are other LPs. The presence of FOIA-eligible LPs may also restrain GPs from overstating results. We find no evidence that FOIA-eligible LPs are disadvantaged in their ability to invest in top-performing funds or funds managed by the most reputable GPs.

DOI:10.1561/114.00000022

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