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

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Listed author(s):
  • Tobias J. Moskowitz
  • Annette Vissing-Jørgensen
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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 trade-off. 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. (JEL G11, G12, M13)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/00028280260344452
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    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 92 (2002)
    Issue (Month): 4 (September)
    Pages: 745-778

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    Handle: RePEc:aea:aecrev:v:92:y:2002:i:4:p:745-778
    Note: DOI: 10.1257/00028280260344452
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    Keywords:

    Find related papers by JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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    14. Kraus, Alan & Litzenberger, Robert H, 1976. "Skewness Preference and the Valuation of Risk Assets," Journal of Finance, American Finance Association, vol. 31(4), pages 1085-1100, September.
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