Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent

Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent

Viral Acharya, Marco Pagano, Paolo Volpin

Series number :

Serial Number: 
398/2014

Date posted :

December 01 2013

Last revised :

January 08 2014
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Keywords

  • short-termism • 
  • executive compensation • 
  • tail risk • 
  • managerial turnover

We present a model in which 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 for insurance of low-quality managers. When instead managers can move across firms, firms cannot offer co-insurance among employees.

In anticipation, risk-averse managers may churn across firms or undertake aggregate risks in order to delay the revelation of their true quality. The result is excessive risk-taking with pay for short-term performance and an accumulation of long-term risks. We conclude with a discussion of policies to address the inefficiency in compensation.

Authors

Real name: 
Fellow, Research Member
Leonard N. Stern School of Business, New York University