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Financial structure, Managerial Compensation and Monitoring

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Author Info
Cerasi, Vittoria () (Statistics Department, Università degli Studi di Milano)
Daltung, Sonja () (Financial Institutions and Markets, Ministry of Finance, Financial Law and Economics Division)

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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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Publisher 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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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
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Related research
Keywords: Keywords: Managerial Compensation; Financial Structure; Monitoring; Diversification.;

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executive Compensation

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References listed on IDEAS
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    Other versions:
  3. DeFusco, Richard A & Johnson, Robert R & Zorn, Thomas S, 1990. " The Effect of Executive Stock Option Plans on Stockholders and Bondholders," Journal of Finance, American Finance Association, vol. 45(2), pages 617-27, June. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
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    Other versions:
  18. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 693-728, August.
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