Abstract

http://ssrn.com/abstract=1107019
 
 

References (42)



 
 

Citations (49)



 


 



A Model of Dynamic Compensation and Capital Structure


Zhiguo He


University of Chicago - Booth School of Business, and NBER

April 19, 2010

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

Abstract:     
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

working papers series





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

Feedback to SSRN


Paper statistics
Abstract Views: 3,509
Downloads: 738
Download Rank: 17,998
References:  42
Citations:  49
Paper comments
No comments have been made on this paper

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 0.313 seconds