Financial Structure, Managerial Compensation and Monitoring

30 Pages Posted: 4 Dec 2006

See all articles by Vittoria Cerasi

Vittoria Cerasi

Bicocca University - Department of Economics, Management & Statistics (DEMS)

Sonja Daltung

Ministry of Finance

Date Written: June 2007

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: Managerial Compensation, Financial Structure, Monitoring, Diversification

JEL Classification: G320, M120

Suggested Citation

Cerasi, Vittoria and Daltung, Sonja, Financial Structure, Managerial Compensation and Monitoring (June 2007). Riksbank Research Paper Series No. 207. Available at SSRN: https://ssrn.com/abstract=948728 or http://dx.doi.org/10.2139/ssrn.948728

Vittoria Cerasi (Contact Author)

Bicocca University - Department of Economics, Management & Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy
+39-02-64485821 (Phone)
+39-02-64485878 (Fax)

Sonja Daltung

Ministry of Finance ( email )

Drottningatan 21
Stockholm 10333, 103 33
Sweden

HOME PAGE: http://www.sweden.gov.se/

Register to save articles to
your library

Register

Paper statistics

Downloads
161
Abstract Views
1,341
rank
185,544
PlumX Metrics