The Private Equity Premium Puzzle Revisited - New Evidence on the Role of Heterogeneous Risk Attitudes
Frank M. Fossen
Free University of Berlin (FUB) - Department of Business and Economics; German Institute for Economic Research (DIW Berlin); Institute for the Study of Labor (IZA)
Economica, Vol. 78, Issue 312, pp. 656-675, 2011
The empirical finding that entrepreneurs invest a large share of their wealth in their own firms, despite comparably low returns and high risk, has become known as the private equity premium puzzle. This paper provides evidence supporting the hypothesis that lower risk‐aversion of entrepreneurs, and thus not necessarily credit constraints, may explain this puzzle. The analysis is based on a representative panel survey for Germany, which provides information on asset portfolios and experimentally validated risk attitudes. The results show that both the ownership probability and the conditional portfolio share of private business equity significantly increase with higher risk‐tolerance.
Number of Pages in PDF File: 20Accepted Paper Series
Date posted: September 21, 2011
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