Using 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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper 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 Date of revision: Handle: RePEc:kud:kuiedp:0203
Contact details of provider: Postal: Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark Phone: (+45) 35 32 26 26 Fax: +45 35 32 30 00 Web page: http://www.econ.ku.dk More information through EDIRC
Order Information: Email:
For technical questions regarding this item, or to correct its listing, contact: (Henriette Aabo Hansen).
Related research
Keywords:
Find related papers by JEL classification: D8 - Microeconomics - - Information, Knowledge, and Uncertainty G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
This paper has been announced in the following NEP Reports:
References listed on IDEAS 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.:
Did you know? You can include your works in the database easily by uploading them on the Munich Personal RePEc Archive (MPRA) if you do not have access to an institutional RePEc archive.