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Financial structure, Managerial Compensation and Monitoring

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  • Cerasi, Vittoria

    ()
    (Statistics Department, Università degli Studi di Milano)

  • Daltung, Sonja

    ()
    (Financial Institutions and Markets, Ministry of Finance, Financial Law and Economics Division)

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 Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 207.

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Length: 30 pages
Date of creation: 01 Jun 2007
Date of revision:
Handle: RePEc:hhs:rbnkwp:0207

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Keywords: Keywords: Managerial Compensation; Financial Structure; Monitoring; Diversification.;

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