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The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?

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  • Tobias J. Moskowitz
  • Annette Vissing-Jorgensen
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    Abstract

    We document the return to investing in U.S. nonpublicly traded equity. Entrepreneurial investment is extremely concentrated, yet despite its poor diversification, we find that the returns to private equity are no higher than the returns to public equity. Given the large public equity premium, it is puzzling why households willingly invest substantial amounts in a single privately held firm with a seemingly far worse risk-return tradeoff. We briefly discuss how large nonpecuniary benefits, a preference for skewness, or overestimates of the probability of survival could potentially explain investment in private equity despite these findings.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8876.

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    Date of creation: Apr 2002
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    Publication status: published as Moskowitz, Tobias J. and Annette Vissing-Jørgensen. “The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?" American Economic Review 92, 4 (2002): 745-778.
    Handle: RePEc:nbr:nberwo:8876

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    2. Malkiel, Burton & Campbell, John & Lettau, Martin & Xu, Yexiao, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Scholarly Articles 3128707, Harvard University Department of Economics.
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