Debt, Managerial Incentives and Learning
AbstractUsing a dynamic model with uncertainty and asymmetric information, we study the impact of debt on managerial compensation and performance targets. In this model, compensation has two roles to play – providing incentives to the manager and learning about his type. We show that debt acts as a substitute of compensation in both dimensions. If uncertainty is not too low, the incentive role of debt dominates the learning role. Thus in the presence of debt, compensation contracts can be more effective in learning about the manager. As debt increases, the pay-performance sensitivity falls and learning increases. We also examine the choice of debt and derive conditions under which a positive level of debt is optimal. We also conduct comparative statistics with respect to the degree of asymmetric information and uncertainty.
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Bibliographic InfoPaper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 02-03.
Length: 33 pages
Date of creation: Feb 2002
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Find related papers by JEL classification:
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-06-24 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Brander, J.A. & Poitevin, M., 1988.
"Managerial Compensation and the Agency Costs of Debt Finance,"
Cahiers de recherche, Universite de Montreal, Departement de sciences economiques
8827, Universite de Montreal, Departement de sciences economiques.
- Brander, J.A. & Poitevin, M., 1988. "Managerial Compensation And The Agency Costs Of Debt Finance," Cahiers de recherche, Centre interuniversitaire de recherche en Ã©conomie quantitative, CIREQ 8827, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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