The Fallacy of New Business Creation as a Disciplining Device for Managers
EFMA 2002 London Meetings; London School of Economics Financial Markets Group Discussion Paper No. 398
30 Pages Posted: 28 Feb 2002
This paper investigates a negative externality of new business creation. When being perceived as a good manager is a necessary condition to establish a firm in the future, we show that a priori talented managers may indulge in undertaking risky projects now. Indeed, such a choice renders more difficult the updating of believes process regarding their actual types. Unfortunately, this in turn leads them to perform less effort, which comes at the expense of economic efficiency. Hence, the career concerns we examine do not discipline good managers. However, we show that employers can reduce managerial slack by resorting to financial markets monitoring.
Keywords: Career Concern, Business Creation, Market Monitoring, Choice of Risk
JEL Classification: G39, G32, D89
Suggested Citation: Suggested Citation