Financial structure, managerial compensation and monitoring

Vittoria Cerasi and Sonja Daltung

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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; diversication (search for similar items in EconPapers)
JEL-codes: G32 M12 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2006-11-08
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http://eprints.lse.ac.uk/24634/ Open access version. (application/pdf)

Related works:
Working Paper: Financial structure, Managerial Compensation and Monitoring (2007)
Working Paper: Financial structure, managerial compensation and monitoring (2006)
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