Financial structure, managerial compensation and monitoring

Sonja Daltung and Vittoria Cerasi ()

FMG Discussion Papers from Financial Markets Group

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.

New Economics Papers: this item is included in nep-bec
Date: 2006-11

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Related works:
Working Paper: Financial structure, Managerial Compensation and Monitoring (2007)
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