Human Capital and the Private Equity Premium
When capital market is imperfect, an entrepreneur has to invest substantial personal funds to start a firm and has to bear large firm-specific risk. Furthermore, if a typical entrepreneur is risk averse, private equity should earn a premium for idiosyncratic risk. In this paper I explore the interaction of human capital with the decision to become an entrepreneur. I calibrate a model of entrepreneurial choice to illustrate a significant attenuating effect of human capital on the premium for firm-specific risk. When an entrepreneur can quit the business and work for hire, the firm-specific risk premium is order of magnitude lower than without this option. While an entrepreneur puts at risk a substantial fraction of financial wealth, she does not commit all human capital to the current business. At stake is only the labor income forgone while managing the firm and the rest of human capital is unaffected by the business risk. Empirical evidence suggests that private equity does not earn any significant premium over publicly traded equity. The model with human capital is consistent with this observation, assuming typical entrepreneur forgoes a small expected return (1.5%) in lieu of intangible benefits of entrepreneurship. (Copyright: Elsevier)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 6 (2003)
Issue (Month): 4 (October)
|Contact details of provider:|| Postal: Marina Azzimonti, Department of Economics, Stonybrook University, 10 Nicolls Road, Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/red/
More information through EDIRC
|Order Information:|| Web: https://www.economicdynamics.org/subscription-information/ Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- João Cocco & Francisco Gomes & Pascal Maenhout, 1998. "Consumption and Portfolio Choice over the Life-Cycle," Center for Economic Studies - Discussion papers ces9805, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992.
"Labor supply flexibility and portfolio choice in a life cycle model,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 16(3-4), pages 427-449.
- Zvi Bodie & Robert C. Merton & William F. Samuelson, 1992. "Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model," NBER Working Papers 3954, National Bureau of Economic Research, Inc.
- Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
- John Heaton & Deborah Lucas, 1993.
"Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing,"
NBER Working Papers
4249, National Bureau of Economic Research, Inc.
- Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-87, June.
- William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc.
- Orazio Attanasio & James Banks & Sarah Tanner, 1998.
"Asset Holding and Consumption Volatility,"
NBER Working Papers
6567, National Bureau of Economic Research, Inc.
- Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
- Chris I. Telmer, 1991.
"Asset Pricing Puzzles and Incomplete Markets,"
806, Queen's University, Department of Economics.
- Heaton, John & Lucas, Deborah, 1997. "Market Frictions, Savings Behavior, And Portfolio Choice," Macroeconomic Dynamics, Cambridge University Press, vol. 1(01), pages 76-101, January.
- John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
- Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
- Vincenzo Quadrini, 1997.
"Entrepreneurship, saving and social mobility,"
Discussion Paper / Institute for Empirical Macroeconomics
116, Federal Reserve Bank of Minneapolis.
- Lucas, Deborah J., 1994. "Asset pricing with undiversifiable income risk and short sales constraints: Deepening the equity premium puzzle," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 325-341, December.
When requesting a correction, please mention this item's handle: RePEc:red:issued:v:6:y:2003:i:4:p:831-845. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.