Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/24054
Authors: 
Müller, Elisabeth
Year of Publication: 
2004
Series/Report no.: 
ZEW Discussion Papers 04-29
Abstract: 
Owners of private companies are often highly underdiversified which exposes them to idiosyncratic risk. We investigate the consequences of underdiversification at the company level. Information on US companies and their owners is obtained from the Survey of Consumer Finances and the Survey of Small Business Finances. Underdiversification, measured as the share of the owner's net worth invested in the company, has a significant positive relationship with profitability, measured as the return on equity. We identify two causes for this underdiversification effect: higher required returns and higher effort. The results have important consequences for investment decisions at private companies.
Subjects: 
underdiversification
required returns
incentives
private companies
wealth
entrepreneurship
JEL: 
G11
G32
more recent Version: 
Document Type: 
Working Paper

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