Financial Structure, Managerial Compensation and Monitoring

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Financial Structure, Managerial Compensation and Monitoring

Author Info

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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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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Paper
- Cerasi, Vittoria & Daltung, Sonja, 2007. "Financial structure, Managerial Compensation and Monitoring," Working Paper Series 207, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
- Sonja Daltung & Vittoria Cerasi, 2006. "Financial structure, managerial compensation and monitoring," FMG Discussion Papers dp576, Financial Markets Group. [Downloadable!] (restricted)

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

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)

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.:

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.
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Other versions:
- Jeremy Edwards & Wolfgang Eggert & Alfons Weichenrieder, 2006. "The Measurement of Firm Ownership and its Effect on Managerial Pay," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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Other versions:
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Other versions:
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Other versions:
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Other versions:
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