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The Private Equity Premium Puzzle Revisited—New Evidence on the Role of Heterogeneous Risk Attitudes
Author(s) -
FOSSEN FRANK M.
Publication year - 2011
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.1468-0335.2010.00864.x
Subject(s) - risk premium , equity premium puzzle , portfolio , private equity , asset (computer security) , empirical evidence , equity risk , equity (law) , risk aversion (psychology) , economics , financial economics , private information retrieval , business , panel data , capital asset pricing model , actuarial science , finance , econometrics , expected utility hypothesis , philosophy , statistics , computer security , mathematics , epistemology , computer science , political science , law
The empirical finding that entrepreneurs invest a large share of their wealth in their own firms, despite comparably low returns and high risk, has become known as the private equity premium puzzle. This paper provides evidence supporting the hypothesis that lower risk‐aversion of entrepreneurs, and thus not necessarily credit constraints, may explain this puzzle. The analysis is based on a representative panel survey for Germany, which provides information on asset portfolios and experimentally validated risk attitudes. The results show that both the ownership probability and the conditional portfolio share of private business equity significantly increase with higher risk‐tolerance.