Principle or Opportunism? Discretion, Capital, and Incentives

Josef Falkinger and Michel Habib
Additional contact information
Michel Habib: University of Zurich and Swiss Finance Institute

No 17-73, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: When should shareholders afford a manager the discretion to be opportunistic and when should they constrain him to be principled? We show that discretion is associated with lower powered incentives than is constraint: opportunism may put shareholder capital at risk; shareholder can lessen that risk by lowering the power of managerial incentives, thereby decreasing the manager’s incentives to spurn principle for opportunity. We further show that the cost of capital plays a central role in favoring discretion over constraint: the use of capital constitutes an externality; when the cost of capital is low, the externality is of relatively little importance, and the manager is afforded the discretion to be opportunistic.

Pages: 59 pages
Date: 2017-12
New Economics Papers: this item is included in nep-hpe
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3099117 (application/pdf)

Related works:
Working Paper: Principle or Opportunism? Discretion, Capital, and Incentives (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1773

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().