Financial Structure, Managerial Compensation and Monitoring
AbstractWhen 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. 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.
Bibliographic InfoPaper provided by Università degli Studi di Milano-Bicocca, Dipartimento di Statistica in its series Working Papers with number 20061102.
Length: 25 pages
Date of creation: Nov 2006
Date of revision:
managerial compensation; financial structure; monitoring; diversification.;
Other versions of this item:
- Vittoria Cerasi & Sonja Daltung, 2006. "Financial structure, managerial compensation and monitoring," LSE Research Online Documents on Economics 24634, London School of Economics and Political Science, LSE Library.
- Cerasi, Vittoria & Daltung, Sonja, 2007. "Financial structure, Managerial Compensation and Monitoring," Working Paper Series 207, Sveriges Riksbank (Central Bank of Sweden).
- Sonja Daltung & Vittoria Cerasi, 2006. "Financial structure, managerial compensation and monitoring," FMG Discussion Papers dp576, Financial Markets Group.
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executives; Executive Compensation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-14 (All new papers)
- NEP-BEC-2007-01-14 (Business Economics)
- NEP-CFN-2007-01-14 (Corporate Finance)
- NEP-FMK-2007-01-14 (Financial Markets)
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.:
- Jay C. Hartzell & Laura T. Starks, 2003. "Institutional Investors and Executive Compensation," Journal of Finance, American Finance Association, vol. 58(6), pages 2351-2374, December.
- Mark R. Huson, 2001. "Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective," Journal of Finance, American Finance Association, vol. 56(6), pages 2265-2297, December.
- Elazar Berkovitch & Ronen Israel & Yossef Spiegel, 2000. "Managerial Compensation and Capital Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 549-584, December.
- John, Teresa A & John, Kose, 1993. " Top-Management Compensation and Capital Structure," Journal of Finance, American Finance Association, vol. 48(3), pages 949-74, July.
- Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
- Calcagno, R. & Renneboog, L.D.R., 2004.
"Capital Structure and Managerial Compensation: The Effects of Renumeration Seniority,"
2004-120, Tilburg University, Center for Economic Research.
- Calcagno, R. & Renneboog, L.D.R., 2004. "Capital Structure and Managerial Compensation: The Effects of Remuneration Seniority," Discussion Paper 2004-015, Tilburg University, Tilburg Law and Economic Center.
- Wolfgang Eggert & Alfons Weichenrieder & Jeremy S.S. Edwards, 2006.
"The Measurement of Firm Ownership and its Effect on Managerial Pay,"
1, University of Paderborn, CIE Center for International Economics.
- Jeremy Edwards & Wolfgang Eggert & Alfons Weichenrieder, 2006. "The Measurement of Firm Ownership and its Effect on Managerial Pay," CESifo Working Paper Series 1774, CESifo Group Munich.
- Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, vol. 24(2), pages 217-254.
- Mathias Dewatripont & Jean Tirole, 1994.
"A theory of debt and equity: diversity of securities and manager-shareholder congruence,"
ULB Institutional Repository
2013/9593, ULB -- Universite Libre de Bruxelles.
- Dewatripont, Mathias & Tirole, Jean, 1994. "A Theory of Debt and Equity: Diversity of Securities and Manager-Shareholder Congruence," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1027-54, November.
- Jensen, M.C. & Murphy, K.J., 1988.
"Performance Pay And Top Management Incentives,"
88-04, Rochester, Business - Managerial Economics Research Center.
- Philip E. Berger & Eli Ofek & David Yermack, 1996.
"Managerial Entrenchment and Capital Structure Decisions,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
96-14, New York University, Leonard N. Stern School of Business-.
- Berger, Philip G & Ofek, Eli & Yermack, David L, 1997. " Managerial Entrenchment and Capital Structure Decisions," Journal of Finance, American Finance Association, vol. 52(4), pages 1411-38, September.
- Laux, Christian, 2001. "Limited-Liability and Incentive Contracting with Multiple Projects," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 514-26, Autumn.
- Hellwig, Martin, 1998. "Allowing for Risk Choices in Diamond's "Financial Intermediation as Delegated Monitoring"," Sonderforschungsbereich 504 Publications 98-04, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
- Mehran, Hamid, 1992. "Executive Incentive Plans, Corporate Control, and Capital Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(04), pages 539-560, December.
- Duru, Augustine & Mansi, Sattar A. & Reeb, David M., 2005. "Earnings-based bonus plans and the agency costs of debt," Journal of Accounting and Public Policy, Elsevier, vol. 24(5), pages 431-447.
- Cerasi, Vittoria & Daltung, Sonja, 2000.
"The optimal size of a bank: Costs and benefits of diversification,"
European Economic Review,
Elsevier, vol. 44(9), pages 1701-1726, October.
- V. Cerasi & S. Daltung, 1995. "The Optimal Size of a Bank: Costs and Benefits of Diversification," Departmental Working Papers 1995-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
- 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.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
- Steven Huddart, 1993. "The Effect of a Large Shareholder on Corporate Value," Management Science, INFORMS, vol. 39(11), pages 1407-1421, November.
- Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matteo Pelagatti).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.