The Private Equity Premium Puzzle Revisited: New Evidence on the Role of Heterogeneous Risk Attitudes
AbstractThe 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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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 839.
Length: 36 p.
Date of creation: 2008
Date of revision:
Publication status: Published in: Economica 78 (2011), Iss. 312, 656-675
Entrepreneurship; Private Equity; Investment; Risk Aversion;
Other versions of this item:
- Frank M. Fossen, 2011. "The Private Equity Premium Puzzle Revisited—New Evidence on the Role of Heterogeneous Risk Attitudes," Economica, London School of Economics and Political Science, vol. 78(312), pages 656-675, October.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-14 (All new papers)
- NEP-CFN-2008-12-14 (Corporate Finance)
- NEP-ENT-2008-12-14 (Entrepreneurship)
- NEP-FMK-2008-12-14 (Financial Markets)
- NEP-UPT-2008-12-14 (Utility Models & Prospect Theory)
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- 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.
- Rostam-Afschar, Davud, 2010. "Entry regulation and entrepreneurship: Empirical evidence from a German natural experiment," Discussion Papers 2010/24, Free University Berlin, School of Business & Economics.
- Rostam-Afschar, Davud, 2012. "Entry Regulation and Entrepreneurship," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62067, Verein für Socialpolitik / German Economic Association.
- 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.
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