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Managerial Reputation, Risk-Taking, and Imperfect Capital Markets

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  • Asano Koji

    (Graduate School of Economics, Osaka University, 1–7 Machikaneyama, Toyonaka, Osaka 560–0043, Japan)

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.

Suggested Citation

  • Asano Koji, 2017. "Managerial Reputation, Risk-Taking, and Imperfect Capital Markets," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 17(1), pages 1-38, January.
    • Handle: RePEc:bpj:bejtec:v:17:y:2017:i:1:p:38:n:1
    DOI: 10.1515/bejte-2014-0104
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    More about this item

    Keywords

    reputation; investment decision; risk-taking; investor protection; pledgeability;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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