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Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent

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Listed:
  • Viral Acharya
  • Marco Pagano
  • Paolo Volpin

Abstract

We present a model in which firms compete for scarce managerial talent ("alpha") and managers are risk averse. When managers cannot move across firms after being hired, employers learn about their talent, efficiently allocate them to projects, and provide insurance to low-quality managers. When, instead, managers can move across firms, firm-level coinsurance is no longer feasible, but managers may self-insure by switching employer to delay the revelation of their true quality. However, this results in inefficient project assignment, with low-quality managers handling projects that are too risky for them.Received September 10, 2015; accepted April 23, 2016 by Editor Itay Goldstein.

Suggested Citation

  • Viral Acharya & Marco Pagano & Paolo Volpin, 2016. "Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent," The Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2565-2599.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:10:p:2565-2599.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw036
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    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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