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Title:Underdiversification in Private Companies: Required Returns and Incentive Effects PDF Logo
Authors:Müller, Elisabeth
Issue Date: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:http://hdl.handle.net/10419/29639
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des ZEW
ZEW Discussion Papers

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