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Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent

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Abstract

We present a model where managers are risk-averse, and firms compete for scarce managerial talent (“alpha”). When managers are not mobile across firms, firms provide efficient compensation, which allows for learning about managerial talent and insures low-quality managers. When instead managers can move across firms, firms cannot provide co-insurance among their employees. In anticipation, risk-averse managers may churn across firms before their true quality is learnt. The result is excessive risk-taking with pay for short-term performance and build up of long-term risks. We conclude with the analysis of policies to address the resulting inefficiency in firms’ compensation.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 312.

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Date of creation: 26 Apr 2012
Date of revision: 10 Mar 2013
Handle: RePEc:sef:csefwp:312

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Keywords: short-termism; executive compensation; tail risk; managerial turnover.;

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  1. Daniel Gottlieb & Kent Smetters, 2011. "Grade Non-Disclosure," NBER Working Papers 17465, National Bureau of Economic Research, Inc.
  2. Bénabou, Roland & Tirole, Jean, 2012. "Bonus Culture: Competitive Pay, Screening and Multitasking," IDEI Working Papers 756, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Gabaix, Xavier & Landier, Augustin, 2008. "Why Has CEO Pay Increased So Much?," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  4. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
  5. Diego Comin & Sunil Mulani, 2006. "Diverging Trends in Aggregate and Firm Volatility," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 374-383, May.
  6. Fahlenbach, Rudiger & Stulz, Rene M., 2009. "Bank CEO Incentives and the Credit Crisis," Working Paper Series 2009-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  7. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
  8. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.
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