Working Paper Series, Sveriges Riksbank (Central Bank of Sweden)
Financial structure, Managerial Compensation and Monitoring
() 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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