Financial structure, Managerial Compensation and Monitoring

Vittoria Cerasi and Sonja Daltung ()
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Sonja Daltung: Financial Institutions and Markets, Ministry of Finance, Financial Law and Economics Division, Postal: S-103 33 Stockholm, Sweden

No 207, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: When 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.

Keywords: Keywords: Managerial Compensation; Financial Structure; Monitoring; Diversification. (search for similar items in EconPapers)
JEL-codes: G32 M12 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2007-06-01
New Economics Papers: this item is included in nep-bec and nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Financial structure, managerial compensation and monitoring (2006)
Working Paper: Financial structure, managerial compensation and monitoring (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0207

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