Managerial Compensation and Capital Structure Under Asymmetric Information

27 Pages Posted: 2 Mar 2007

See all articles by Kostas Koufopoulos

Kostas Koufopoulos

University of Warwick - Finance Group

Multiple version iconThere are 2 versions of this paper

Date Written: January 2007

Abstract

We consider project financing when the project quality is private information of the manager and, given its inherent quality, the project viability depends on the manager exerting unobservable effort. We show that capital structure matters even though managerial contracts are optimally designed. We also provide an explanation of why good firms issue both debt and underpriced equity (even if the bankruptcy and agency costs of debt are zero). Finally, we show that the optimal financial contract can be implemented by a combination of debt and equity. Our results have a number of testable implications.

Keywords: Asymmetric Information, Capital Structure, Managerial Compensation

JEL Classification: D82, G32

Suggested Citation

Koufopoulos, Kostas, Managerial Compensation and Capital Structure Under Asymmetric Information (January 2007). Available at SSRN: https://ssrn.com/abstract=967284 or http://dx.doi.org/10.2139/ssrn.967284

Kostas Koufopoulos (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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