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Author: Yossi Spiegel
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Book Description
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.
Author: Yossi Spiegel
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Book Description
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.
Author: Xiaodong Xu
Publisher:
ISBN:
Category :
Languages : en
Pages : 28
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Book Description
While firm growth critically depends on financing ability and access to external capital, the operations management literature seldom considers the effects of financial constraints on the firms' operational decisions. Another critical assumption in traditional operations models is that corporate managers always act in the firm owners' best interests. Managers are, however, agents of the owners of the company, whose interests are often not aligned with those of equity-holders or debt-holders; hence, managers may make major decisions that are suboptimal from the firm owners' point of view. This paper builds on a news vendor model to make optimal production decisions in the presence of financial constraints and managerial incentives. We explore the relationship between operating conditions and financial leverage and observe that financial leverage can increase as margins reach either low or high extremes. We also provide some empirical support for this observation. We further extend our model to consider the effects of agency costs on the firm's production decision and debt choice by including performance-based bonuses in the manager's compensation. Our analyses show how managerial incentives may drive a manager to deviate from firm-optimal decisions and that low-margin producers face significant risk from this agency cost while high-margin producers face relatively low risk in using such compensation.
Author: Dilip B. Madan
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper provides an optimal design of managerial compensation in the presence of an exogenous capital structure with its associated debt agency costs. The model entails the analysis of a three-party conflict between debtholders, equity holders, and management. Equityholders, as principals owning a production technology, design a compensation contract for managers. Management is engaged solely in the choice of project risk with risky return outcomes along a production frontier. It is shown that, in the absence of debt, risk averse managers would tend to risk-shift downwards, realizing suboptimal firm value. In the presence of a senior debt claim equity holders find it advantageous to choose higher risk projects and it is possible that for sufficiently high debt levels, the agency costs of debt and managerial risk aversion counterbalance each other, with the final outcome coinciding with first best risk choices. The empirical relationship between capital structure and compensation is also studied, as are the implications of debt and risk aversion for the pay- performance relations.
Author: Kostas Koufopoulos
Publisher:
ISBN:
Category :
Languages : en
Pages : 27
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Book Description
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.
Author: Arvin Ghosh
Publisher: Routledge
ISBN: 1351530178
Category : Business & Economics
Languages : en
Pages : 140
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Book Description
Capital structure theory is one of the most dynamic areas of finance and forms the basis for modern thinking on the capital structure of firms. Much controversy has resulted from comparisons of the theory of capital structure originally developed by Franco Modigliani and Merton Miller to real-world situations. Two competing theories have emerged over the years, the optimal capital structure theory and the pecking order theory.Arvin Ghosh begins with an overview of the controversies regarding capital structure theories, and then statistically tests both the optimal capital structure and pecking order theories. Using the binomial approach he analyzes the determinants of capital structure while discussing the role of market power in determining capital structure decisions. Ghosh probes the questions of new stock offerings and stockholders' returns, and analyzes capital structure and executive compensation. He then looks into debt financing ownership structure, and the controversal relationship between capital structure and firm profitability. Finally, he discusses the latest developments in the field of capital structure.A concise overview of a major issue in business economics and finance, this volume provides a fuller understanding of capital structure influence on the financial performance of firms, and will certainly stimulate further debate. While hundreds of scholarly articles have been written on the subject this is the first book to test competing theories against measurements of firms' performance and their underlying capital structure.
Author: Riccardo Calcagno
Publisher:
ISBN:
Category :
Languages : en
Pages : 34
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Book Description
We show that the relative seniority of debt and managerial compensation has important implications on the design of remuneration contracts. Whereas the traditional literature assumes that debt is senior to remuneration, we show that this is frequently not the case according to bankruptcy regulation and as observed in practice. We theoretically show that including risky debt changes the incentive to provide the manager with stronger performance-related incentives (quot;contract substitutionquot; effect). If managerial compensation has priority over the debt claims, higher leverage produces lower power-incentive schemes (lower bonuses) and a higher base salary. With junior compensation, we expect more emphasis on pay-for-performance incentives. The empirical findings are in line with the regime of remuneration seniority as the base salary is significantly higher and the performance bonus is lower in financially distressed firms.
Author: Riccardo Calcagno
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Author: Angel N. Salinas González
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 434
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Book Description
Author: Elazar Berkovitch
Publisher:
ISBN:
Category :
Languages : en
Pages : 68
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Author: Hernan Ortiz-Molina
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
I examine how CEO compensation is related to firms' capital structures. My tests address the simultaneity of these decisions and distinguish between debt types with different theoretical implications for managerial incentives. Pay-performance sensitivity decreases in straight-debt leverage, but is higher in firms with convertible debt. Furthermore, stock option policy is the component of CEO pay that is most sensitive to differences in capital structure. The results strongly support the hypothesis that firms trade-off shareholder-manager incentive alignment in order to mitigate shareholder-bondholder conflicts of interest. The hypothesis that debt reduces manager-shareholder conflicts can explain some but not all of the results.
