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

See all articles by Frederic Loss

Frederic Loss

London School of Economics & Political Science (LSE) - Financial Markets Group

Antoine Renucci

University of Toulouse 1

Abstract

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

Loss, Frederic and Renucci, Antoine, 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. Available at SSRN: https://ssrn.com/abstract=301365 or http://dx.doi.org/10.2139/ssrn.301365

Frederic Loss (Contact Author)

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 2078523569 (Phone)

Antoine Renucci

University of Toulouse 1

Place Anatole France
Department of Finance
F-31042 Toulouse Cedex
France

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