The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?
National Bureau of Economic Research (NBER); University of California Berkeley, Haas School of Business
Tobias J. Moskowitz
AQR Capital; University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
NBER Working Paper No. w8876
We document the return to investing in U.S. nonpublicly traded equity. Entrepreneurial investment is extremely concentrated, yet despite its poor diversification, we find that the returns to private equity are no higher than the returns to public equity. Given the large public equity premium, it is puzzling why households willingly invest substantial amounts in a single privately held firm with a seemingly far worse risk-return tradeoff. We briefly discuss how large nonpecuniary benefits, a preference for skewness, or overestimates of the probability of survival could potentially explain investment in private equity despite these findings.
Number of Pages in PDF File: 54
Date posted: April 4, 2002