Institutional Reinvestments in Private Equity Funds as a Double-Edged Sword: The Role of the Status Quo Bias
Journal
Journal of Behavioral Finance
ISSN
1542-7560
ISSN-Digital
1542-7579
Type
journal article
Date Issued
2013-05-29
Author(s)
Abstract
Reinvestments can be a rational investment strategy for institutional investors in private equity funds to make use of inside information from previous funds or to get preferred access to restricted funds. However, reinvestments could also be motivated by a status quo bias, which describes a behavioral tendency to pursue the status quo option disproportionately often. This paper investigates the role of the status quo bias for institutional investments in private equity funds. Based on our fieldwork and a unique data set of 136 institutional investors and private equity firms in Germany, we show that institutional investors strongly prefer private equity firms in which they have invested before. The magnitude of the status quo bias depends on the nature of the investment opportunity and certain investor characteristics. Our results suggest that reinvestments are a double-edged sword for institutional investors that can result from a rational investment strategy, but also from an irrational investment behavior.
Language
English
Keywords
Private equity
Investment decisions
Institutional investors
Status quo bias
Decision biases
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Routledge, Taylor & Francis
Publisher place
New York
Volume
14
Number
2
Start page
134
End page
148
Pages
15
Subject(s)
Division(s)
Eprints ID
205384