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Expected Returns to Stock Investments by Angel Investors in Groups

Federal Reserve Bank of Atlanta Working Paper Series No. 2010-14

50 Pages Posted: 19 Sep 2010  

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance

Gerald P. Dwyer

Clemson University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2010

Abstract

Angel investors invest billions of dollars in thousands of entrepreneurial projects annually, far more than the number of firms that obtain venture capital. Previous research has calculated realized internal rates of return on angel investments, but empirical estimates of expected returns have not yet been produced. Although calculations of realized returns are a valuable contribution, expected returns, rather than realized returns, drive investment decisions. We use a new data set and statistical framework to produce the first empirical estimates of expected returns on angel investments. We also allow for the time value of money, which previous research has typically ignored. Our sample of 588 investments spans the 1972–2007 period and contains 419 exited investments. We conduct extensive tests to explore potential bias in the data set and conclude that the evidence in favor of bias is tenuous at best. Our results suggest that angel investors in groups can expect to earn returns that are on the order of returns on venture capital investments. Estimated net returns are about 70 percent in excess of the riskless rate per year for an average holding period of 3.67 years. This estimate is reasonable compared to Cochrane's (2005) estimate of 59 percent per year for venture capital investments, which tend to be in lower-variance, later-stage projects. Returns have a large variance and are heavily skewed, with many losses and occasional extraordinarily high returns.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2133427

Keywords: Angel Investor, Expected Return, Private Equity

JEL Classification: G24, G20

Suggested Citation

DeGennaro, Ramon P. and Dwyer, Gerald P., Expected Returns to Stock Investments by Angel Investors in Groups (August 1, 2010). Federal Reserve Bank of Atlanta Working Paper Series No. 2010-14. Available at SSRN: https://ssrn.com/abstract=1679207 or http://dx.doi.org/10.2139/ssrn.1679207

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance ( email )

423 Stokely Management Center
Knoxville, TN 37996
United States
865-974-1726 (Phone)
865-974-1716 (Fax)

Gerald P. Dwyer (Contact Author)

Clemson University ( email )

Department of Economics
Clemson University
Clemson, SC 29634
United States

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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