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The Private Equity Premium Puzzle Revisited

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  • Katya Kartashova

Abstract

In this paper, I extend the results of Moskowitz and Vissing-Jørgensen (2002) on the returns to entrepreneurial investments in the United States. First, following the authors’ methodology I replicate the original findings from the Survey of Consumer Finances (SCF) for the period 1989–1998 and show that the returns to private and public equity are similar. I then extend the period under consideration using data from subsequently released waves of SCF 2001, 2004, and 2007 and assess the robustness of their results to this extension. I find that the “private equity premium puzzle” is not a robust feature of the data and does not survive beyond the period of high public equity returns in the 1990s. In particular, returns to entrepreneurial equity remain largely unaffected when public equity returns plunge to near zero values between 1999 and 2001. The average return to private equity exceeds public equity return in 1999-2007 and for the period 1989-2007 as a whole. To validate the results, I provide alternative measures of private equity returns in the data.

Suggested Citation

  • Katya Kartashova, 2011. "The Private Equity Premium Puzzle Revisited," Staff Working Papers 11-6, Bank of Canada.
  • Handle: RePEc:bca:bocawp:11-6
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    References listed on IDEAS

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    1. Steven N. Kaplan & Antoinette Schoar, 2005. "Private Equity Performance: Returns, Persistence, and Capital Flows," Journal of Finance, American Finance Association, vol. 60(4), pages 1791-1823, August.
    2. Ellen R. McGrattan & Edward C. Prescott, 2005. "Expensed and sweat equity," Working Papers 636, Federal Reserve Bank of Minneapolis.
    3. Robert E. Hall & Susan E. Woodward, 2007. "The Incentives to Start New Companies: Evidence from Venture Capital," NBER Working Papers 13056, National Bureau of Economic Research, Inc.
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    1. repec:wsi:qjfxxx:v:02:y:2012:i:03:n:s2010139212500115 is not listed on IDEAS

    More about this item

    Keywords

    Financial markets; Recent economic and financial developments; Interest rates;

    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
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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