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

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...

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Bibliographic Details
Published in:The American economic review 2002-09, Vol.92 (4), p.745-778
Main Authors: Moskowitz, Tobias J., Vissing-Jørgensen, Annette
Format: Article
Language:English
Subjects:
Business structures
C corporations
Closely held corporations
Collaboration
Diversification
Economics
Entrepreneurs
Equity
Estimated taxes
Estimates
Financial investments
Households
Human capital
Investment
Investment policy
Investments
Investors
Market value
National income and product accounts
NIPA
Portfolio analysis
Private equity
Proprietors
Rates of return
Return on equity
Statistical analysis
Studies
U.S.A
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Summary: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.
ISSN:0002-8282
1944-7981
DOI:10.1257/00028280260344452