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Executive Compensation and the Optimality of Managerial Entrenchment

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  • Gary Gorton
  • Bruce D. Grundy

Abstract

Firms are more complicated than standard principal-agent theory allows: firms have assets-in-place; firms endure through time, allowing for the possibility of replacing a shirking manager; firms have many managers, constraining the amount of equity that can be awarded to any one manager; and, a firm's owner can transfer some control to a manager, thereby entrenching her. Recognizing these characteristics, we solve for the vesting dates; wage, equity and options components; and control rights of an optimal contract. Managerial entrenchment makes the promise of deferred compensation credible. Deferring compensation by delaying vesting reduces a manager's ability to free-ride on a replacement's effort.
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Suggested Citation

  • Gary Gorton & Bruce D. Grundy, "undated". "Executive Compensation and the Optimality of Managerial Entrenchment," Rodney L. White Center for Financial Research Working Papers 15-96, Wharton School Rodney L. White Center for Financial Research.
  • Handle: RePEc:fth:pennfi:15-96
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    References listed on IDEAS

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    Cited by:

    1. Dow, James, 2013. "Boards, CEO entrenchment, and the cost of capital," Journal of Financial Economics, Elsevier, vol. 110(3), pages 680-695.
    2. Marcello Spanò, 2007. "Managerial Ownership and Corporate Hedging," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(7-8), pages 1245-1280.
    3. David R. Skeie, 2007. "Vesting and control in venture capital contracts," Staff Reports 297, Federal Reserve Bank of New York.

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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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