Empirical Analysis of the Rates of Return Produced by Entrepreneurial Organizations Reaching Initial Public Offering

Robert Fiore, Mark Howard
(Springfield College, Alden Street, Springfield, MA 01109, USA)

Abstract: Successful Entrepreneurial behavior produces economic value. Hence, growth in rates of return informs entrepreneurship expressed as a percentage change in economic value. This paper examines the measurable rates of return produced by instances of entrepreneurial organization. The authors employ data supplied by a NSF grant in a 2004 study produced by John Cochrane of the University of Chicago and a separate study by Michael Ewens, University of California. Data used by Cochrane and Ewens supports evidence that the rates of return on venture capital funds investing in early stage enterprise are significantly greater than returns on investments in mature firms in efficient markets. Furthermore, this study applies said data to the field of entrepreneurship to demonstrate the very high rates of return produced by entrepreneurial behavior during early periods of high growth. Annualized rates of return greater than 500% are reported, supporting the postulate that entrepreneurial organizational behavior can produce extraordinary multipliers in economic value that are substantially greater than the rate produced by mature firms. Empirical evidence of the extent and range of high rates of return are important to both investors and entrepreneurial practitioners as they require nominal expected values to set appropriate goals in business planning.

Key words: entrepreneurship; venture capital; private equity; rates of return

JEL codes: M13, M21, D04