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Returns to Private Equity - Idiosyncratic Risk Does Matter!

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  • Elisabeth Mueller

Abstract

Owners of private companies often invest a substantial share of their net worth in one company, which exposes them to idiosyncratic risk. We investigate whether owners of US companies require compensation for lack of diversification in the form of higher returns on equity. Exposure to idiosyncratic risk is measured as the share of the owner's net worth invested in the company. Equity returns are measured as the earnings rate and as capital gains. For both returns measures we find a positive and significant influence of exposure to idiosyncratic risk. This paper improves our understanding of returns on private equity. Copyright 2010, Oxford University Press.

Suggested Citation

  • Elisabeth Mueller, 2010. "Returns to Private Equity - Idiosyncratic Risk Does Matter!," Review of Finance, European Finance Association, vol. 15(3), pages 545-574.
    • Handle: RePEc:oup:revfin:v:15:y:2010:i:3:p:545-574
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    File URL: http://hdl.handle.net/10.1093/rof/rfq003
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    Cited by:

    1. Francisco Amaral & Martin Dohmen & Sebastian Kohl & Moritz Schularick, 2021. "Superstar Returns," Working Papers hal-03881493, HAL.
    2. Mueller, Elisabeth, 2008. "How does owners' exposure to idiosyncratic risk influence the capital structure of private companies?," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 185-198, March.
    3. Pierpaolo Pattitoni & Barbara Petracci & Massimo Spisni, 2014. "Determinants of profitability in the EU-15 area," Applied Financial Economics, Taylor & Francis Journals, vol. 24(11), pages 763-775, June.
    4. Francisco Amaral & Martin Dohmen & Sebastian Kohl & Moritz Schularick, 2025. "Superstar Returns? Spatial Heterogeneity in Returns to Housing," Journal of Finance, American Finance Association, vol. 80(5), pages 3057-3094, October.
    5. Roger, Patrick & Schatt, Alain, 2016. "Idiosyncratic risk, private benefits, and the value of family firms," Finance Research Letters, Elsevier, vol. 17(C), pages 235-245.
    6. Wang, Chong & Wang, Neng & Yang, Jinqiang, 2012. "A unified model of entrepreneurship dynamics," Journal of Financial Economics, Elsevier, vol. 106(1), pages 1-23.

    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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