American Economic Review: Vol. 92 No. 4 (September 2002)
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The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?
Moskowitz, Tobias J., and Annette Vissing-Jørgensen. 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?" American Economic Review, 92(4): 745-778.
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 trade-off. 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. (JEL G11, G12, M13)
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Moskowitz, Tobias J.