A model of managerial compensation, firm leverage and credit stimulus

Rajdeep Chakraborti, Sandeep Dahiya, Lei Ge and Pedro Gete

Journal of Financial Stability, 2024, vol. 72, issue C

Abstract: We study a model in which leverage and compensation are both choice variables for the firm and borrowing spreads are endogenous. First, we analyze the correlation between leverage and variable compensation. We show that allowing for endogenous compensation and leverage can explain the conflicting findings of the empirical literature. We uncover a new channel of complementarity between effort and leverage that induces a correlation sign opposite to what current theoretical models predict. Second, we study the dynamics of leverage and compensation design after a credit stimulus. We derive a set of new empirical predictions. For outward-shifts in credit supply, variable compensation is increasing in leverage growth. Moreover, variable compensation increases after the credit stimulus, especially for firms with low idiosyncratic risk.

Keywords: Compensation; Credit policies; Executive ownership; Leverage (search for similar items in EconPapers)
JEL-codes: E44 G28 G30 G32 G34 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:72:y:2024:i:c:s1572308924000330

DOI: 10.1016/j.jfs.2024.101248

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