Cerasi, Vittoria and Daltung, Sonja (2006) Financial structure, managerial compensation and monitoring. Discussion paper, 576. Financial Markets Group, London School of Economics and Political Science, London, UK.
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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.
| Item Type: | Monograph (Discussion Paper) |
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| Official URL: | http://fmg.lse.ac.uk |
| Additional Information: | © 2006 The Authors |
| Uncontrolled Keywords: | Managerial compensation, Financial structure, Monitoring, Diversication |
| Library of Congress subject classification: | H Social Sciences > HG Finance H Social Sciences > HB Economic Theory |
| Journal of Economic Literature Classification System: | M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration > M12 - Personnel Management G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure |
| Sets: | Research centres and groups > Financial Markets Group (FMG) Collections > Economists Online |
| Rights: | http://www.lse.ac.uk/library/rights/LSERO.htm |
| Identification Number: | 576 |
| URL: | http://eprints.lse.ac.uk/24634/ |
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