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  3. American Economic Review
  4. September 2002
  5. The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

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

  • Tobias J. Moskowitz
  • Annette Vissing-Jørgensen
American Economic Review
vol. 92, no. 4, September 2002
(pp. 745–778)
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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)

Citation

Moskowitz, Tobias, J., and Annette Vissing-Jørgensen. 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?" American Economic Review, 92 (4): 745–778. DOI: 10.1257/00028280260344452

JEL Classification

  • G12 Asset Pricing; Trading Volume; Bond Interest Rates
  • M13 New Firms; Startups
  • G24 Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies