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Seeking Alpha - Excess Risk Taking and Competition for Managerial Talent

Author

Listed:
  • Viral Acharya

    (New York University)

  • Marco Pagano

    (University of Naples "Federico II" and EIEF)

  • Paolo Volpin

    (City University London)

Abstract

We present a model where 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, allocate them efficiently 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. (JEL D62,G32, G38, J33)

Suggested Citation

  • Viral Acharya & Marco Pagano & Paolo Volpin, 2013. "Seeking Alpha - Excess Risk Taking and Competition for Managerial Talent," EIEF Working Papers Series 1303, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2016.
  • Handle: RePEc:eie:wpaper:1303
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    References listed on IDEAS

    as
    1. 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, February.
    2. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 49-100.
    3. Ing-Haw Cheng & Harrison Hong & Jose Scheinkman, 2010. "Yesterday's Heroes: Compensation and Creative Risk-Taking," NBER Chapters,in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
    4. Fahlenbrach, Rüdiger & Stulz, René M., 2011. "Bank CEO incentives and the credit crisis," Journal of Financial Economics, Elsevier, vol. 99(1), pages 11-26, January.
    5. 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 561-574, September.
    6. Daniel Gottlieb & Kent Smetters, 2011. "Grade Non-Disclosure," NBER Working Papers 17465, National Bureau of Economic Research, Inc.
    7. 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.
    8. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Thanassoulis, John, 2014. "Bank pay caps, bank risk, and macroprudential regulation," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 139-151.
    2. 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.
    3. Marco Pagano & Luca Picariello, 2017. "Talent Discovery, Layoff Risk and Unemployment Insurance," EIEF Working Papers Series 1710, Einaudi Institute for Economics and Finance (EIEF), revised Aug 2017.
    4. Andrew Ellul & Marco Pagano & Annalisa Scognamiglio, 2017. "Career Risk and Market Discipline in Asset Management," EIEF Working Papers Series 1715, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2017.
    5. Efing, Matthias & Hau, Harald & Kampkötter, Patrick & Steinbrecher, Johannes, 2015. "Incentive pay and bank risk-taking: Evidence from Austrian, German, and Swiss banks," Journal of International Economics, Elsevier, vol. 96(S1), pages 123-140.
    6. Ferreira, Daniel & Nikolowa, Radoslawa, 2017. "Adverse Selection and Assortative Matching in Labor Markets," CEPR Discussion Papers 11869, C.E.P.R. Discussion Papers.
    7. Stijn Claessens, 2015. "An Overview of Macroprudential Policy Tools," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 397-422, December.
    8. Diego d'Andria, 2016. "Employed inventors, inter-firm mobility, bonus pay with multi-stage R&D processes, and optimal innovation policy," JRC Working Papers on Taxation & Structural Reforms 2016-02, Joint Research Centre (Seville site).
    9. Roland Bénabou & Jean Tirole, 2016. "Bonus Culture: Competitive Pay, Screening, and Multitasking," Journal of Political Economy, University of Chicago Press, vol. 124(2), pages 305-370.
    10. Sergey Chernenko & Samuel G. Hanson & Adi Sunderam, 2014. "The Rise and Fall of Demand for Securitizations," NBER Working Papers 20777, National Bureau of Economic Research, Inc.
    11. Bannier, Christina E. & Feess, Eberhard & Packham, Natalie, 2014. "Incentive schemes, private information and the double-edged role of competition for agents," CFS Working Paper Series 475, Center for Financial Studies (CFS).
    12. Acharya, Sushant & Pedraza, Alvaro, 2015. "Asset price effects of peer benchmarking: evidence from a natural experiment," Staff Reports 727, Federal Reserve Bank of New York.
    13. repec:eee:tefoso:v:127:y:2018:i:c:p:38-56 is not listed on IDEAS
    14. Marco Pagano, 2014. "Dealing with Financial Crises: How Much Help from Research?," CSEF Working Papers 361, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    15. Boustanifar, Hamid & Grant, Everett & Reshef, Ariell, 2016. "Wages and human capital in finance: international evidence, 1970-2005," Globalization and Monetary Policy Institute Working Paper 266, Federal Reserve Bank of Dallas.
    16. Daniel Ferreira & Radoslawa Nikolowa, 2015. "Misallocation of Talent in Competitive Labor Markets," Working Papers 740, Queen Mary University of London, School of Economics and Finance.

    More about this item

    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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