Optimal Executive Compensation when Firm Size Follows Geometric Brownian Motion
This paper studies a continuous-time agency model in which the agent controls the drift of the geometric Brownian motion firm size. The changing firm size generates partial incentives, analogous to awarding the agent equity shares according to her continuation payoff. When the agent is as patient as investors, performance-based stock grants implement the optimal contract. Our model generates a leverage effect on the equity returns, and implies that the agency problem is more severe for smaller firms. That the empirical evidence shows that grants compensation are largely based on the CEO's historical performance--rather than current performance--lends support to our model. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: email@example.com., Oxford University Press.
Volume (Year): 22 (2009)
Issue (Month): 2 (February)
|Contact details of provider:|| Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.|
Web page: http://www.rfs.oupjournals.org/
More information through EDIRC
|Order Information:||Web: http://www4.oup.co.uk/revfin/subinfo/|
When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:22:y:2009:i:2:p:859-892. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.