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Sveriges Riksbank (Central Bank of Sweden) Working Paper Series, Sveriges Riksbank (Central Bank of Sweden)

No 207:
Financial structure, Managerial Compensation and Monitoring

Vittoria Cerasi () and Sonja Daltung ()

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: Keywords: Managerial Compensation; Financial Structure; Monitoring; Diversification.; (follow links to similar papers)

JEL-Codes: G32; M12; (follow links to similar papers)

30 pages, June 1, 2007

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