DP3610 Fighting for Talent: Risk-Shifting, Corporate Volatility, and Organizational Change

Author(s): Guido Friebel, Mariassunta Giannetti
Publication Date: October 2002
Keyword(s): financial development, markets, organizations, sorting, spin-offs
JEL(s): G30, L20
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3610

In the nineties, average firm size decreased, organizations decentralized, and workers preferences shifted from large to small firms. Our model identifies the economic forces behind this trend. Small firms with little capital risk are subject to risk shifting. They realize more of their workers’ risky ideas, helping small firms to poach creative workers from better-capitalized firms. This advantage increases if a) workers receive easier credit access, and b) technological progress raises the payoff from new ideas, provided that it remains very difficult to distinguish good ideas from bad ideas. As small firms take excessive risk, average enterprise profitability decreases, while bankruptcy increases. Moreover, large firms react through inefficient organizational changes.