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Executive Incentive Plans, Corporate Control, and Capital Structure

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Author Info
Mehran, Hamid

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Abstract

Agency theory recognizes that the interests of managers and shareholders may conflict and that, left on their own, managers may make major financial policy decisions, such as the choice of a capital structure, that are suboptimal from the shareholders' standpoint. The theory also suggests, however, that compensation contracts, managerial equity investment, and monitoring by the board of directors and major shareholders can reduce conflicts of interest between managers and shareholders. This research investigates the relationship between the firm's capital structure and 1) executive incentive plans, 2) managerial equity investment, and 3) monitoring by the board of directors and major shareholders. This paper finds a positive relationship between the firm's leverage ratio and 1) percentage of executives' total compensation in incentive plans, 2) percentage of equity owned by managers, 3) percentage of investment bankers on the board of directors, and 4) percentage of equity owned by large individual investors. These findings are consistent with the predictions of agency theory, suggesting, in turn, that capital structure models that ignore agency costs are incomplete.

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File URL: http://journals.cambridge.org/abstract_S0022109000008243
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Publisher Info
Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 27 (1992)
Issue (Month): 04 (December)
Pages: 539-560
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cup:jfinqa:v:27:y:1992:i:04:p:539-560_00

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  1. Hamid Mehran & Joseph Tracy, 2001. "The effect of employee stock options on the evolution of compensation in the 1990s," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 17-34. [Downloadable!]
  2. Hamid Mehran & Joseph Tracy, 2001. "The Impact of Employee Stock Options on the Evolution of Compensation in the 1990s," NBER Working Papers 8353, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Thierry Poulain-Rehm, 2003. "Stock-options, décisions financières des dirigeants et création de valeur de l'entreprise:le cas français," Revue Finance Contrôle Stratégie, Editions Economica, vol. 6(3), pages 79-116, September. [Downloadable!]
  4. Rebel A. Cole & Hamid Mehran, 1996. "The effect of changes in ownership structure on performance: evidence from the thrift industry," Finance and Economics Discussion Series 96-6, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  5. Rubén Arrondo & Silvia Gómez-Ansón, 2003. "A study of Spanish firms' security issue decision under asymmetric information and agency costs," Applied Financial Economics, Taylor and Francis Journals, vol. 13(10), pages 771-782, October. [Downloadable!] (restricted)
  6. Neelam Jain, 2002. "Debt, Managerial Incentives and Learning," Discussion Papers 02-03, University of Copenhagen. Department of Economics. [Downloadable!]
  7. Allen N. Berger & Emilia Bonaccorsi di Patti, 2002. "Capital structure and firm performance: a new approach to testing agency theory and an application to the banking industry," Finance and Economics Discussion Series 2002-54, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  8. Doocheol Moon & Kishore Tandon, 2007. "The influence of growth opportunities on the relationship between equity ownership and leverage," Review of Quantitative Finance and Accounting, Springer, vol. 29(4), pages 339-351, November. [Downloadable!] (restricted)
  9. Ayub Mehar, 2005. "Impacts of equity financing on liquidity position of a firm," Applied Financial Economics, Taylor and Francis Journals, vol. 15(6), pages 425-438, March. [Downloadable!] (restricted)
  10. Chrisostomos Florackis & Aydin Ozkan, 2006. "What Reduces the Impact of Managerial Entrenchment on Agency Costs? Evidence for UK Firms," Discussion Papers 06/03, Department of Economics, University of York. [Downloadable!]
  11. Nigel Driffield & Vidya Mahambare & Sarmistha Pal, 2005. "How Ownership Structure Affects Capital Structure and Firm Performance? Recent Evidence from East Asia," Finance 0505010, EconWPA. [Downloadable!]
    Other versions:
  12. Evaldo Guimarães Barbosa & Cristiana De Castro Moraes, 2003. "Determinants Of The Firm’S Capital Structure - The Case Of The Very Small Enterprises," Finance 0302001, EconWPA, revised 14 Feb 2003. [Downloadable!]
  13. Maria-Teresa Marchica, . "Debt Maturity and the Characteristics of Ownership Structure: An Empirical Investigation of UK Firms," Discussion Papers 05/29, Department of Economics, University of York. [Downloadable!]
  14. Rosenberg, Matts, 2003. "Stock Option Compensation in Finland: An Analysis of Economic Determinants, Contracting Frequency, and Design," Working Papers 496, Hanken School of Economics. [Downloadable!]
  15. Jong, A. de, 2001. "The disciplining role of leverage in Dutch firms," Discussion Paper 48, Tilburg University, Center for Economic Research. [Downloadable!]
  16. Jong, A. de & Dijk, R. van, 1998. "Determinants of leverage and agency problems," Discussion Paper 82, Tilburg University, Center for Economic Research. [Downloadable!]
  17. Cerasi, Vittoria & Daltung, Sonja, 2007. "Financial structure, Managerial Compensation and Monitoring," Working Paper Series 207, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
    Other versions:
  18. George W. Fenn & Nellie Liang, 1999. "Corporate payout policy and managerial stock incentives," Finance and Economics Discussion Series 1999-23, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  19. Nigel Driffield & Vidya Mahambare & Sarmistha Pal, 2006. "How Does Ownership Structure Affect Capital Structure and Firm Performance? Recent Evidence from East Asia," Economics and Finance Discussion Papers 06-23, Economics and Finance Section, School of Social Sciences, Brunel University. [Downloadable!]
  20. Hamid Mehran & Joshua Rosenberg, 2007. "The effect of employee stock options on bank investment choice, borrowing, and capital," Staff Reports 305, Federal Reserve Bank of New York. [Downloadable!]
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