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Payout Policy, Capital Structure, and Compensation Contracts When Managers Value Control

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  • Chang, Chun
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    Abstract

    The optimal contract between managers and investors is endogenously derived when managers have preferences for both monetary compensation and corporate resources under their control. When the optimal payout is privately known to managers, they can be induced to make payouts by linking their compensation to the payout. Public equity is a claim on this discretionary payout. If investors can obtain new information about the firm's optimal payout level, it can be utilized by transferring the control from management to investors. The new information allows the firm to achieve a more efficient allocation through recontracting. We show that the new information will be obtained if and only if the payout falls below a promised level. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 6 (1993)
    Issue (Month): 4 ()
    Pages: 911-33

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    Handle: RePEc:oup:rfinst:v:6:y:1993:i:4:p:911-33

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    Cited by:
    1. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "Empire-Builders and Shirkers: Investment, Firm Performance, and Managerial Incentives," NBER Working Papers 7335, National Bureau of Economic Research, Inc.
    2. Xu, Peng, 1997. "Executive Salaries as Tournament Prizes and Executive Bonuses as Managerial Incentives in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 11(3), pages 319-346, September.
    3. Douglas, Alan V. S., 2001. "Managerial replacement and corporate financial policy with endogenous manager-specific value," Journal of Corporate Finance, Elsevier, vol. 7(1), pages 25-52, March.
    4. Joachim Jungherr, 2012. "Financial Amplification, Executive Compensation, and Optimal Capital Structure," 2012 Meeting Papers 933, Society for Economic Dynamics.

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