Risk-Adjusting the Returns to Venture Capital
Journal of Finance, Forthcoming
Rock Center for Corporate Governance at Stanford University Working Paper No. 180
Stanford University Graduate School of Business Research Paper No. 14-10
49 Pages Posted: 14 Aug 2013 Last revised: 17 Jun 2015
There are 3 versions of this paper
Risk-Adjusting the Returns to Venture Capital
Risk-Adjusting the Returns to Venture Capital
Risk-Adjusting the Returns to Venture Capital
Date Written: June 16, 2015
Abstract
We adapt stochastic discount factor (SDF) valuation methods for venture capital (VC) performance evaluation. Our approach generalizes the popular Public Market Equivalent (PME) method and it allows statistical inference in the presence of cross-sectionally dependent, skewed VC payoffs. We relax SDF restrictions implicit in the PME so that the SDF can accurately reflect risk-free rates and returns of public equity markets during the sample period. This generalized PME yields substantially different abnormal performance estimates for VC funds and start-up investments, especially in times of strongly rising public equity markets and for investments with betas far from one.
Keywords: venture capital, private equity, risk-adjusted returns, performance measurement, stochastic discount factor, CAPM, PME, GMM
JEL Classification: G12, G24
Suggested Citation: Suggested Citation
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