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

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Author Info
Frank M. Fossen

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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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Publisher 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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Related research
Keywords: Entrepreneurship; Private Equity; Investment; Risk Aversion;

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
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

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This page was last updated on 2009-12-7.

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