The masquerade ball of the CEOs and the mask of excessive risk

Çitçi, Haluk and İnci, Eren (2012) The masquerade ball of the CEOs and the mask of excessive risk. [Working Paper / Technical Report] Sabanci University ID:SU_FASS_2012/0002

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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.

Item Type:Working Paper / Technical Report
Subjects:H Social Sciences > HB Economic Theory
ID Code:18804
Deposited By:Eren İnci
Deposited On:24 Jan 2012 16:05
Last Modified:31 Jul 2019 10:12

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