Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies

The Review of Financial Studies, Vol. 23, No. 10, pp. 3738-3772, 2011

63 Pages Posted: 27 Oct 2011

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)

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Date Written: January 1, 2011

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 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.

Suggested Citation

Korteweg, Arthur G. and Sørensen, Morten, Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies (January 1, 2011). The Review of Financial Studies, Vol. 23, No. 10, pp. 3738-3772, 2011. Available at SSRN: https://ssrn.com/abstract=1949366

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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