A compensation scheme for optimal investment decisions

David Cardoso and Paulo J. Pereira

Finance Research Letters, 2015, vol. 14, issue C, 150-159

Abstract: We derive an optimal compensation scheme that aims to eliminate inadequate misaligned managerial actions ensuring optimal investment decisions. With this model, the owners of the option to invest do not need to follow the future evolution of project value drivers in order to guarantee optimal behavior. The optimal contract scheme is a correct balance between effort costs, fixed wages, and a value-sharing bonus. As shown, even small deviations from the optimal compensation scheme may lead to highly sub-optimal decisions. The model is extended to accommodate impatience behavior by the managers or the shareholders.

Keywords: Real options; Investment timing; Agency; Optimal contracting (search for similar items in EconPapers)
JEL-codes: D81 D82 G31 J33 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:14:y:2015:i:c:p:150-159

DOI: 10.1016/j.frl.2015.05.004

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