Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies

Review of Financial Studies, Forthcoming

AFA 2009 San Francisco Meetings Paper

58 Pages Posted: 25 Mar 2008 Last revised: 13 Jan 2015

See all articles by Arthur G. Korteweg

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Morten Sorensen

Copenhagen Business School; Columbia Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: November 16, 2009

Abstract

Valuations of entrepreneurial companies are only observed occasionally, albeit more frequently for well-performing companies. Consequently, estimators of risk and return must correct for sample selection to obtain consistent estimates. We develop a general model of dynamic sample selection model and estimate it using data from venture capital investments in entrepreneurial companies. Our selection correction leads to markedly lower intercepts and higher estimates of risks compared to previous studies. The methodology is generally applicable to estimating risk and return in illiquid markets with endogenous trading.

Keywords: Entrepreneurship, Venture Capital, Sample Selection, Liquidity, Endogenous Trading, MCMC, Gibbs Sampling

JEL Classification: C11, C32, G24, M13

Suggested Citation

Korteweg, Arthur G. and Sørensen, Morten, Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies (November 16, 2009). Review of Financial Studies, Forthcoming; AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1108610 or http://dx.doi.org/10.2139/ssrn.1108610

Arthur G. Korteweg

University of Southern California - Marshall School of Business ( email )

3670 Trousdale Parkway
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~korteweg/

Morten Sørensen (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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