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The Masquerade Ball of the CEOs and the Mask of Excessive Risk

  • Citci, Haluk
  • Inci, Eren

We analyze the effects of CEOs' layoff risk on their risk choice while overseeing a firm. A CEO, whose managerial ability is unknown, is fired if her expected ability is below average. Her risk choice changes the informativeness of output and market's belief about her ability. She can decrease her layoff risk by taking excessive risk and trade off current compensation for layoff risk. The firm may voluntarily or involuntarily allow excessive risk taking even under optimal linear compensation contracts. Above-average CEOs always keep their jobs, but among below-average CEOs, a higher-ability one is more likely to be fired.

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File URL: https://mpra.ub.uni-muenchen.de/35979/1/MPRA_paper_35979.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35979.

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Date of creation: 2012
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Handle: RePEc:pra:mprapa:35979
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