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The Private Equity Premium Puzzle Revisited: New Evidence on the Role of Heterogeneous Risk Attitudes

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  • Frank M. Fossen

Abstract

The empirical finding that entrepreneurs tend to invest a large share of their wealth in their own firms despite comparably low returns and high risk has become known as the private equity premium puzzle. This paper provides evidence supporting the hypothesis that lower risk aversion of entrepreneurs, and not necessarily credit constraints, may explain this puzzle. The analysis is based on a large, representative panel data set for Germany, which provides information on asset portfolios and experimentally validated risk attitudes. The results show that both the ownership probability and the conditional portfolio share of private business equity significantly increase with higher risk tolerance.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.92003.de/dp839.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 839.

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Length: 36 p.
Date of creation: 2008
Date of revision:
Handle: RePEc:diw:diwwpp:dp839

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Keywords: Entrepreneurship; Private Equity; Investment; Risk Aversion;

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Cited by:
  1. Weber, Jeremy G. & Key, Nigel, 2013. "Does proprietor wealth influence small business decisions? Land appreciation and farm business borrowing, land ownership, and output," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150408, Agricultural and Applied Economics Association.
  2. Davud Rostam-Afschar, 2010. "Entry Regulation and Entrepreneurship: Empirical Evidence from a German Natural Experiment," Discussion Papers of DIW Berlin 1065, DIW Berlin, German Institute for Economic Research.
  3. Cumming, Douglas & Li, Dan, 2013. "Public policy, entrepreneurship, and venture capital in the United States," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 345-367.

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