Resource title

Underdiversification in Private Companies: Required Returns and Incentive Effects

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Resource description

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.

Resource author

Elisabeth Müller

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/24054

Resource license

Adapt according to the presented license agreement and reference the original author.