Managerial Reputation, Risk-Taking, and Imperfect Capital Markets

Research output: Contribution to journalArticlepeer-review

Abstract

This paper presents a model of portfolio management with reputation concerns in imperfect capital markets. Managers with financial constraints raise funds from investors and select a project that is characterized by the degree of risk. Managers differ in their ability to determine the probability of success. Based on past performance, all agents revise beliefs about managers' ability, and the beliefs affect the availability of funds in the future. This provides motivation for managers to build reputation by manipulating their performance through project selection. We show that the quality of investor protection changes fund flows, thereby influencing managers' project selection. Our model predicts that strong investor protection causes risk-taking behavior, whereas weak investor protection leads to risk-averse behavior.

Original languageEnglish
Article number20140104
JournalB.E. Journal of Theoretical Economics
Volume17
Issue number1
DOIs
Publication statusPublished - 2017 Jan

Keywords

  • investment decision
  • investor protection
  • pledgeability
  • reputation
  • risk-taking

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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