The Return to Direct Investment in Private Firms: New Evidence on the Private Equity Premium Puzzle*

This paper uses a novel dataset to analyze the return to direct investments in private firms by pension funds. We have two key findings. First, direct investments in private firms have underperformed public equity by 392 basis points per annum under conservative risk adjustments. Second, initial mispricing, due to over‐optimism or misperceived risk, and subsequent low capital gains seem to explain the gap in returns to private firms. Overall, these findings complement the finding of Moskowitz and Vissing‐Jørgensen (2002) of low returns on entrepreneurial investments and provide new insight into the existence of what they call the private equity premium puzzle: Even professional investors with well‐diversified portfolios like pension funds seem to get a poor risk‐return tradeoff from investing directly in private firms.     

The periurban city: why to live between the suburbs and the countryside

The last 30 years have witnessed the emergence of a new pattern of urban development in France, called the periurban belt. It is defined as a belt outside the city occupied both by households and farmers. We develop a residential model in which households commuting to an employment center may choose to live with farmers in this mixed belt because they value the rural amenities created by farming activities. Both types of agents compete on the land market and the equilibrium conditions allow us to obtain an analytical solution and to provide some insights about the robustness of the periurban form against decreases in commuting costs. Finally, the model is calibrated on French data.     

Travelling ‘green’: is tourists' happiness at stake?

Several western governments have implemented environmental policies which increase the cost of air travel. Such policies aim to reduce the impact of air travel on climate change, but at the same time they restrict tourists in their travels. This study examines the extent to which the average tourist's happiness is affected by ‘involuntary green travel’, defined as reduced CO₂ emission travel imposed by government regulations. This issue was addressed in a study among 588 Dutch citizens who completed a self-report questionnaire containing questions about their happiness. The strongest determinant of tourists' happiness is freedom in choosing a destination. Any policy measure that interferes with tourists' freedom in destination choice will negatively affect tourists' happiness. Six percent of their happiness is at stake and potentially 17% of all holiday trips are affected. The number of tourists involved is possibly much smaller. The best options for governments are to impose taxes on long-haul destinations, which affect only a small share of all tourists, and air routes which can also be travelled by a variety of alternative modes of transport and thus less limiting to destination choice within this market segment.     

Optimal portfolio delegation when parties have different coefficients of risk aversion

We consider the problem of delegated portfolio management when the involved parties are risk-averse. The agent invests the principal's money in the financial market, and in return he receives a compensation which depends on the value that he generates over some period of time. We use a dual approach to explicitly solve the agent's problem analytically and subsequently we use this solution to solve the principal's problem numerically. The interaction between the principal's and the agent's risk aversion and the optimal compensation scheme is studied and, for example, in the case of the more risk averse agent according to common folklore the principal should optimally choose a fee schedule such that the agent's derived risk aversion decreases. We illustrate that this is not always the case.     

FDI and the relevance of spatial linkages: do third-country effects matter for Dutch FDI?

The aim of this paper is to test for the relevance of spatial linkages for Dutch (outbound) foreign direct investment (FDI). We estimate a spatial lag model for Dutch FDI to 18 host countries. After controlling for fixed effects, we find for our sample period 1984–2004 that third-country effects matter. Apart from our benchmark spatial lag model, we also estimate various alternative models by looking at European host FDI countries only, by dividing FDI into industry and services FDI, and by estimating a spatial error model.

Horizon dependence of utility optimizers in incomplete models

This paper studies the utility maximization problem with changing time horizons in the incomplete Brownian setting. We first show that the primal value function and the optimal terminal wealth are continuous with respect to the time horizon T. Secondly, we exemplify that the expected utility stemming from applying the T-horizon optimizer on a shorter time horizon S<T may fail to converge to the T-horizon value as S↑T. Finally, we provide necessary and sufficient conditions preventing the existence of this phenomenon.     

Private contracting and corporate governance: Evidence from the provision of tag-along rights in Brazil

We identify two opposing effects of issuing equity with tag-along rights that secure an equal price in the event of a takeover. First, the anti-self dealing effect commits controlling owners to sell only to new owners that increase shareholder value. Second, the rent transfer effect shifts rents to existing unprotected minority owners. The institutional setting in Brazil's stock market allows us to test this trade-off. We find that announcements of tag-along rights are associated with an average cumulative abnormal return of around 5%, and that the probability of issuing shares with tag-along rights increases with the cost of self-dealing and decreases in the share of existing unprotected minority investors. Overall, our analysis confirms that private contracting can mitigate the economic costs associated with the inadequate legal protection of investors in emerging markets.