CEO Compensation and the Capital Structure of Firms

Pricila Maziero

No 511, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the optimal capital structure of firms in the presence of limited commitment and asymmetric information on the CEO’s effort. Firms face endogenous borrowing constraints due to the presence of lack of commit- ment on debt repayment. Firms are also subject to imperfect information on the effort provided by the CEO. We analyze the optimal financing policy of the firm and find that the novel interaction of these two friction leads to im- portant implications to financing dynamics. First, even when the firms grow by accumulating capital, the borrowing constraints on debt still are present leading to more costly debt and an unbalanced level of debt and equity. Also, there is CEO turnover in equilibrium, following periods of low productivity.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:511

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