Excess Risk Taking and Competition for Managerial Talent

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2014-03-31


Editor's Note: The following post comes to us from Viral Acharya, Professor of Finance at NYU; Marco Pagano, Professor of Economic Policy at the University of Naples Federico II; and Paolo Volpin of the Finance Area at London Business School.

Excessive risk-taking by financial institutions and overly generous executive pay are widely regarded as key factors in the 2007-09 crisis. In particular, it has become commonplace to blame banks and securities companies for compensation packages that reward managers (and more generally, other risk-takers such as traders and salesmen) generously for making investments with high returns in the short run but large risks that emerge only in the long run. As governments have been forced to rescue failing financial institutions, politicians and the media have stressed the need to cut executive pay packages and rein in incentives based on options and bonuses, making them more dependent on long-term performance and in extreme cases eliminating them outright. It is natural to ask whether this is the right policy response to the problem. It is crucial to ask what is the root of the problem—that is, precisely which market failure produced excessive risk-taking.

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academic research banking & financial institutions executive compensation executive turnover financial institutions labor markets management marco pagano paolo volpin risk-taking short-termism viral acharya


R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation,

Date tagged:

03/31/2014, 15:30

Date published:

03/31/2014, 09:07