References (42)


Citations (45)



A Model of Dynamic Compensation and Capital Structure

Zhiguo He

University of Chicago - Booth School of Business, and NBER; affiliation not provided to SSRN

April 19, 2010

AFA 2009 San Francisco Meetings Paper
Journal of Financial Economics (JFE), Forthcoming

This paper studies the optimal compensation problem between shareholders and the agent in a general cash-flow setup, and offers a framework to quantitatively assess the impact of agency problems. Under the structural model of capital structure studied in Leland (1994), we find that the debt-overhang effect on the endogenous managerial incentives lowers the optimal leverage. Consistent with the data, our model delivers a negative relation between pay-performance sensitivity and firm size, and the interaction between debt-overhang and agency issue leads smaller firms to take less leverage relative to their larger peers. During financial distress, a firm's cash-flow becomes more sensitive to underlying performance shocks due to debt-overhang. The implications on credit spreads and debt covenants are also considered.

Number of Pages in PDF File: 40

Keywords: Continuous-time Contracting, Capital Structure, CARA (Exponential) Preference, Firm Growth, Size-Heterogeneity, Pay-Performance Sensitivity.

JEL Classification: C73, G32, J33, D82

Open PDF in Browser Download This Paper

Date posted: March 18, 2008 ; Last revised: July 15, 2010

Suggested Citation

He, Zhiguo, A Model of Dynamic Compensation and Capital Structure (April 19, 2010). AFA 2009 San Francisco Meetings Paper; Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1107019 or http://dx.doi.org/10.2139/ssrn.1107019

Contact Information

Zhiguo He (Contact Author)
University of Chicago - Booth School of Business, and NBER ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://faculty.chicagobooth.edu/zhiguo.he/pubs.html

Chicago Booth School of Business Logo

affiliation not provided to SSRN
Feedback to SSRN

Paper statistics
Abstract Views: 3,668
Downloads: 754
Download Rank: 20,622
References:  42
Citations:  45
Paper comments
No comments have been made on this paper

© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.407 seconds