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The fallacy of new business creation as a disciplining device for managers

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  • Loss, Frederic
  • Renucci, Antoine

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.

Suggested Citation

  • Loss, Frederic & Renucci, Antoine, 2002. "The fallacy of new business creation as a disciplining device for managers," LSE Research Online Documents on Economics 24902, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:24902
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    References listed on IDEAS

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    Cited by:

    1. Antoine Renucci & Frédéric Loss, 2004. "When Promotions Induce Good Managers to Be Lazy," Econometric Society 2004 North American Winter Meetings 263, Econometric Society.

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    More about this item

    Keywords

    career concern; business creation; market monitoring; choice of risk;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other

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