A large literature on delegated asset management has analyzed the role of information disclosure, especially in situation where managers have significant discretion about reporting on investment choices, performance, and risk. Managers might have incentives to disclose or withhold information strategically, either obscuring or overstating the performance of transactions. This problem is especially prevalent in private capital markets where the underlying assets typically lack continuous market prices and often are difficult for outsiders to scrutinize.

In Communicating Performance: Textual and Financial Disclosures in Private Equity, Josh Lerner, Fiona Paine, and Antoinette Schoar study how general partners (GPs) in private equity funds provide information to their limited partners (LPs) about the performance of their portfolio investments. The paper focuses on two primary channels through which managers can communicate information about the performance of portfolio firms—financial reporting on the valuation of the portfolio firms and more qualitative textual reports.

(more…)