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Fighting for Talent: Risk-shifting, Corporate Volatility, and Organizational Change

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  • Guido Friebel
  • Mariassunta Giannetti

Abstract

In the nineties, average firm size decreased, organisations decentralized, and workers preferences shifted from large to small firms. Our model identifies the economic forces behind this trend. Small firms with little capital at risk are subject to risk-shifting. They realize more of their workers‘ risky ideas, helping small firms to poach creative workers from better capitalized firms. This advantage increases if a) workers receive easier credit access, and b) technological progress raises the payoff from new ideas, provided that it remains very difficult to distinguish good ideas from bad ideas. As small firms take excessive risk, average enterprise profitability decreases, while bankruptcy increases. Moreover, large firms react through ineffecient organizational changes.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 793.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_793

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Keywords: financial development; spin-offs; sorting; organizations; markets;

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  1. Hellmann, Thomas F., 2002. "When Do Employees Become Entrepreneurs?," Research Papers 1770, Stanford University, Graduate School of Business.
  2. Denis Gromb & David Scharfstein, 2002. "Entrepreneurship in Equilibrium," NBER Working Papers 9001, National Bureau of Economic Research, Inc.
  3. Luigi Zingales, 2000. "In Search of New Foundations," CRSP working papers 515, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. Raghuram G. Rajan & Luigi Zingales, 2000. "The Governance of the New Enterprise," NBER Working Papers 7958, National Bureau of Economic Research, Inc.
  5. Sah, Raaj Kumar & Stiglitz, Joseph E, 1988. "Committees, Hierarchies and Polyarchies," Economic Journal, Royal Economic Society, vol. 98(391), pages 451-70, June.
  6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  7. Julio Rotemberg & Garth Saloner, 2000. "Visionaries, Managers, and Strategic Direction," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 693-716, Winter.
  8. Richard E. Caves, 1998. "Industrial Organization and New Findings on the Turnover and Mobility of Firms," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 1947-1982, December.
  9. Pryor, Frederic L., 2001. "Will most of us be working for giant enterprises by 2028?," Journal of Economic Behavior & Organization, Elsevier, vol. 44(4), pages 363-382, April.
  10. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  11. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
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Cited by:
  1. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2009. "Matching Firms, Managers, and Incentives," EIEF Working Papers Series 0901, Einaudi Institute for Economic and Finance (EIEF), revised Feb 2009.
  2. Hvide, Hans K. & Kristiansen, Eirik G., 2006. "Management of Knowledge Workers," Discussion Papers 2006/7, Department of Finance and Management Science, Norwegian School of Economics.
  3. Giannetti, Mariassunta, 2011. "Liquidity constraints and occupational choice," Finance Research Letters, Elsevier, vol. 8(1), pages 37-44, March.

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