This paper examines the implications of corporate manager's tendency to promote her private benefits by realizing inefficient investments that incurs a cost for shareholders in terms of lost shareholder value. Under reasonable conditions, we derive an expression for such a loss and propose a compensation scheme providing an incentive to avoid inefficent investments. The scheme amends the well-established linear incentive scheme with a call option, the strike price of which is endogenously determined by the scale of corporate investment as well as investment returns in alternative equally risky projects.
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Length: 24 pages Date of creation: 2000 Date of revision: Handle: RePEc:fth:helsec:480
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