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Real options and earnings-based bonus compensation

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  • Huang, Hsing-Hua
  • Huang, Hongming
  • Shih, Pai-Ta
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    Abstract

    This study extends the works of Mauer and Sarkar (2005) and Andrikopoulos (2009) by incorporating a regime-dependent earnings-based bonus into managerial compensation. Examining the individual effects of ownership shares and earnings-based bonus compensation, we find that the former provides managers with incentives to issue debt, whereas the latter induces the opposite result, although consistent impacts are found for the two types of compensation on both agency costs and the optimal investment decisions of managers. When managerial compensation comprises both ownership shares and an earnings-based bonus, there are significant differences in the effects of these two types of performance compensation on managers’ optimal investment and financing decisions, agency costs, optimal debt ratios and credit spreads, as a result of the specific interactions between the investment and financing decisions.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 8 ()
    Pages: 2389-2402

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:8:p:2389-2402

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Real options; Earnings-based bonus compensation; Ownership shares compensation; Capital structure;

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    References

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