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Performance-based bonuses for investment and abandonment decisions

Hwa-Sung Kim

Finance Research Letters, 2016, vol. 18, issue C, 120-126

Abstract: This paper examines whether a performance-based bonus for a manager’s investment influences her abandonment decision. First, we derive optimal performance-based bonuses for investment and abandonment decisions. Second, we show that there could be a discrepancy between the managers abandonment timing and that of the shareholders, even though an appropriate performance-based bonus was compensated to mitigate agency conflicts in the investment decision. Third, we also show that as long as the manager is contracted to receive the optimal performance-based bonus for the abandonment decision, only the effort costs that she incurs affect the abandonment timing.

Keywords: Real option; Investment decision; Abandonment decision; Agency problem; Performance-based bonus (search for similar items in EconPapers)
JEL-codes: D81 D86 G31 J33 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:18:y:2016:i:c:p:120-126

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