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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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)|
|Additional Information:||© 2006 The Authors|
|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
Collections > LSE Financial Markets Group (FMG) Working Papers
|Date Deposited:||29 Jul 2009 10:07|
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