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The masquerade ball of the CEOs and the mask of excessive risk

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  • Citci, Sadettin Haluk
  • Inci, Eren

Abstract

Two well-known explanations for excessive risk taking by CEOs are limited liability, which protects them from the downward risks of their project choices, and convex compensation schemes that encourage risk taking. This paper provides a career-concerns-based motive for why a CEO might choose an excessively risky project even in the absence of them. A CEO of unknown managerial ability could be fired if she is found to be below average. To limit this layoff risk, she tries to conceal her true type by choosing excessively risky projects. Excessive risk taking makes the firm unable to determine if a poor outcome resulted from incompetency or negative risk realization.

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  • Citci, Sadettin Haluk & Inci, Eren, 2016. "The masquerade ball of the CEOs and the mask of excessive risk," Economic Modelling, Elsevier, vol. 58(C), pages 383-393.
    • Handle: RePEc:eee:ecmode:v:58:y:2016:i:c:p:383-393
    DOI: 10.1016/j.econmod.2016.03.023
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    Cited by:

    1. François Desmoulins-Lebeault & Luc Meunier, 2018. "Moment Risks: Investment for Self and for a Firm," Decision Analysis, INFORMS, vol. 15(4), pages 242-266, December.
    2. Yarram, Subba Reddy & Rice, John, 2017. "Executive compensation among Australian mining and non-mining firms: Risk taking, long and short-term incentives," Economic Modelling, Elsevier, vol. 64(C), pages 211-220.
    3. Karpavičius, Sigitas & Yu, Fan, 2018. "The impact of dividend-protected CEO equity incentives on firm value and risk," Economic Modelling, Elsevier, vol. 71(C), pages 16-24.
    4. Citci, Sadettin Haluk & Inci, Eren, 2016. "Career concerns and Bayesian overconfidence of managers," International Journal of Industrial Organization, Elsevier, vol. 46(C), pages 137-159.

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    More about this item

    Keywords

    Career concern; CEO turnover; Excessive risk taking; Managerial conservatism; Reputation;
    All these keywords.

    JEL classification:

    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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