Managerial Compensation and Capital Structure

50 Pages Posted: 22 Dec 1998

See all articles by Yossi Spiegel

Yossi Spiegel

Tel Aviv University, Coller School of Management; Centre for Economic Policy Research (CEPR); ZEW – Leibniz Centre for European Economic Research

Elazar Berkovitch

Interdisciplinary Center, Herzliyah

Ronen Israel

Interdisciplinary Center, Herzliyah

Date Written: October 1998

Abstract

We investigate the interaction between financial structure and managerial compensation in the context of a managerial entrenchment model in the spirit of Shleifer and Vishny (1989). We show that risky debt affects both the probability of managerial replacement and the manager's wage if he is retained by the firm. Our model yields a rich set of predictions including the following:

The market values of equity and debt decrease if the manager is replaced. Moreover, the expected cash flow of firms that retain their managers exceeds that of firms that replace their managers.

Firms that publicly announce the adoption of a new managerial compensation plan should experience positive price reactions in the capital market as well as strong positive performance following the adoption.

Managers of firms with risky debt outstanding are promised lower severance payments (golden parachute) than managers of firms that do not have risky debt.

Controlling for firm's size, leverage, managerial compensation, and the cash flow of firms that retain their managers are positively correlated.

Controlling for firm's size, the probability of managerial turnover and firm value are negatively correlated.

JEL Classification: G32, J33

Suggested Citation

Spiegel, Yossi and Berkovitch, Elazar and Israel, Ronen, Managerial Compensation and Capital Structure (October 1998). Available at SSRN: https://ssrn.com/abstract=142951 or http://dx.doi.org/10.2139/ssrn.142951

Yossi Spiegel (Contact Author)

Tel Aviv University, Coller School of Management ( email )

Ramat Aviv, Tel Aviv, 69978
Israel
972-3-640-9063 (Phone)
972-3-640-7739 (Fax)

HOME PAGE: http://www.tau.ac.il/~spiegel

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Elazar Berkovitch

Interdisciplinary Center, Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Ronen Israel

Interdisciplinary Center, Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel
972-9-9527306 (Phone)

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