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Measuring Institutional Investors’ Skill at Making Private Equity Investments
Author(s) -
CAVAGNARO DANIEL R.,
SENSOY BERK A.,
WANG YINGDI,
WEISBACH MICHAEL S.
Publication year - 2019
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12783
Subject(s) - private equity , standard deviation , equity (law) , institutional investor , sample (material) , variance (accounting) , economics , private equity fund , econometrics , business , financial economics , finance , accounting , statistics , mathematics , corporate governance , chemistry , chromatography , political science , law
Using a large sample of institutional investors’ investments in private equity funds raised between 1991 and 2011, we estimate the extent to which investors’ skill affects their returns. Bootstrap analyses show that the variance of actual performance is higher than would be expected by chance, suggesting that some investors consistently outperform. Extending the Bayesian approach of Korteweg and Sorensen, we estimate that a one‐standard‐deviation increase in skill leads to an increase in annual returns of between one and two percentage points. These results are stronger in the earlier part of the sample period and for venture funds.