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

  • Friebel, Guido
  • Giannetti, Mariassunta

In the nineties, average firm size decreased, organizations decentralized, and workers preferences shifted from large to small firms. Our model identifies the economic forces behind this trend. Small firms with little capital 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 inefficient organizational changes.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3610.

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Date of creation: Oct 2002
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Handle: RePEc:cpr:ceprdp:3610
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  9. 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.
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