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.
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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:
- 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.
- 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.
- 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)
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