Underdiversification in Private Companies - Required Returns and Incentive Effects
نویسنده
چکیده
Owner-managers of private companies are often highly underdiversified. We investigate the consequences of underdiversification at the company level. Information on US companies and their owner-managers is obtained from the Survey of Consumer Finances and the Survey of Small Business Finances. Underdiversification, measured as the share of the owner-manager’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. Consistent with decreasing relative risk aversion, this effect is smaller for richer owner-managers. JEL classification: G32, G11
منابع مشابه
Underdiversification of Owner-Managers - Required Returns and Incentive Effects
Owner-managers of private companies are often highly underdiversified. We investigate the consequences of underdiversification at the company level. There is a strong positive relationship between underdiversification, measured as the share of personal net worth invested in the company, and profitability, measured as the return on equity. The analysis identifies two causes for this underdiversi...
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