Financial Structure, Managerial Compensation and Monitoring

Vittoria Cerasi and Sonja Daltung

No 20061102, Working Papers from Università degli Studi di Milano-Bicocca, Dipartimento di Statistica

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: managerial compensation; financial structure; monitoring; diversification. (search for similar items in EconPapers)
JEL-codes: G32 M12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-fmk
Date: 2006-11

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Persistent link: http://EconPapers.repec.org/RePEc:mis:wpaper:20061102

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