Optimal Executive Compensation when Firm Size Follows Geometric Brownian Motion
AbstractThis paper studies a continuous-time agency model in which the agent controls the drift of the geometric Brownian motion firm size. The changing firm size generates partial incentives, analogous to awarding the agent equity shares according to her continuation payoff. When the agent is as patient as investors, performance-based stock grants implement the optimal contract. Our model generates a leverage effect on the equity returns, and implies that the agency problem is more severe for smaller firms. That the empirical evidence shows that grants compensation are largely based on the CEO's historical performance--rather than current performance--lends support to our model. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: email@example.com., Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Studies in its journal The Review of Financial Studies.
Volume (Year): 22 (2009)
Issue (Month): 2 (February)
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- Keiichi Hori & Hiroshi Osano, 2013.
"Managerial Incentives and the Role of Advisors in the Continuous-Time Agency Model,"
Review of Financial Studies,
Society for Financial Studies, vol. 26(10), pages 2620-2647.
- Hiroshi Osano & Keiichi Hori, 2013. "Managerial Incentives and the Role of Advisors in the Continuous-Time Agency Model," KIER Working Papers 863, Kyoto University, Institute of Economic Research.
- Grochulski, Borys & Zhang, Yuzhe, 2011.
"Optimal risk sharing and borrowing constraints in a continuous-time model with limited commitment,"
Journal of Economic Theory,
Elsevier, vol. 146(6), pages 2356-2388.
- Grochulskiy, Borys & Zhang, Yuzhe, 2011. "Optimal risk sharing and borrowing constraints in a continuous-time model with limited commitment," MPRA Paper 36539, University Library of Munich, Germany.
- He, Zhiguo, 2011. "A model of dynamic compensation and capital structure," Journal of Financial Economics, Elsevier, vol. 100(2), pages 351-366, May.
- Grochulski, Borys & Zhang, Yuzhe, 2009. "Borrowing Constraint as an Optimal Contract," MPRA Paper 23216, University Library of Munich, Germany.
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