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The B.E. Journal of Theoretical Economics

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Managerial Reputation, Risk-Taking, and Imperfect Capital Markets

Koji Asano
  • Corresponding author
  • Graduate School of Economics, Osaka University, 1–7 Machikaneyama, Toyonaka, Osaka 560–0043, Japan
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Published Online: 2016-07-12 | DOI: https://doi.org/10.1515/bejte-2014-0104


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.

Keywords: reputation; investment decision; risk-taking; investor protection; pledgeability

JEL Classification: G31; G32


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About the article

Published Online: 2016-07-12

Published in Print: 2017-01-01

Citation Information: The B.E. Journal of Theoretical Economics, Volume 17, Issue 1, 20140104, ISSN (Online) 1935-1704, ISSN (Print) 2194-6124, DOI: https://doi.org/10.1515/bejte-2014-0104.

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