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Financial structure, managerial compensation and monitoring

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  • Sonja Daltung
  • Vittoria Cerasi

Abstract

When a firm has external debt and monitoring by shareholders is essential, managerial bonuses are shown to be an optimal solution. A small managerial bonus linked to firm's performance not only reduces moral hazard between managers and shareholders, but also between creditors and monitoring shareholders. A negative relation between corporate bond yields and managerial bonuses can be predicted. Furthermore, the model shows how higher managerial pay-performance sensitivity goes hand in hand with greater company leverage and lower company diversification. These predictions find some support in the empirical literature.

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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp576.

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Date of creation: Nov 2006
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Handle: RePEc:fmg:fmgdps:dp576

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  1. Philip E. Berger & Eli Ofek & David Yermack, 1996. "Managerial Entrenchment and Capital Structure Decisions," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-14, New York University, Leonard N. Stern School of Business-.
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