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Financial Structure, Managerial Compensation and Monitoring

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  • Vittoria Cerasi
  • Sonja Daltung

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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File URL: http://www.statistica.unimib.it/utenti/WorkingPapers/WorkingPapers/20061102.pdf
File Function: First version, 8 November 2006
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Bibliographic Info

Paper provided by Università degli Studi di Milano-Bicocca, Dipartimento di Statistica in its series Working Papers with number 20061102.

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Length: 25 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:mis:wpaper:20061102

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Keywords: managerial compensation; financial structure; monitoring; diversification.;

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