Working Paper: NBER ID: w8876
Authors: Tobias J. Moskowitz; Annette Vissing-Jørgensen
Abstract: 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.
Keywords: No keywords provided
JEL Codes: G11; G12; M13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private equity investment (G24) | average return on private equity (G12) |
| high entrepreneurial risk tolerance (L26) | decision to invest in private equity (G11) |
| concentration of private equity ownership among households (D14) | poor diversification (G11) |
| poor diversification (G11) | lower return (G19) |
| households with entrepreneurial equity (D14) | high risk of investment failure (G24) |