Are Debt and Incentive Compensation Substitutes in Controlling the Free Cash Flow Agency Problem?
"This paper investigates the governance implications of a firm's capital structure and managerial incentive compensation in controlling the free cash flow agency problem. The results suggest: debt and executive stock options act as substitutes in attenuating a firm's free cash flow problem; failure to incorporate the substitutability and endogeneity leads to underestimates of the magnitude and economic implication of the disciplinary role of both mechanisms; firm characteristics differ across the prevalence of debt usage versus option usage, suggesting the heterogeneity in the costs and benefits of the monitoring devices; and all the above effects are more pronounced in firms that tend to have more severe agency problem." Copyright (c) 2009 Financial Management Association International.
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Volume (Year): 38 (2009)
Issue (Month): 3 (09)
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