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Author: Keiichi Hori
Publisher:
ISBN:
Category :
Languages : en
Pages : 52
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Book Description
In this paper, we adapt a continuous-time agency model to incorporate the loss-aversion preferences of agents. To this end, by distinguishing between the gains in capital and income driven by variations in the agent's continuation payoff, we provide a theoretical model which overcomes the problem that the loss of utility arising from loss aversion disappears entirely with a continuous-time limit. We then show that the optimal contract includes part that is strictly positive but insensitive to the agent's continuation payoff, and part that encompasses a range of option-type payoffs. Implementing the optimal contract using a combination of equity, long-term debt, and a line of credit, we also predict that dividend payments are insensitive to changes in the firm's performance as long as its performance is moderately good. In addition, we derive some relations between dividends, the credit line balance (equity value), the limit of the credit line, and long-term debt. These results provide a unified explanation for the evolution of CEO compensation and corporate dividend-smoothing policy. The results also yield several predictions about dynamic capital structure in line with the empirical literature. In terms of robustness, the endogenous determination of the utility reference point does not greatly affect our main results.
Author: Keiichi Hori
Publisher:
ISBN:
Category :
Languages : en
Pages : 52
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Book Description
In this paper, we adapt a continuous-time agency model to incorporate the loss-aversion preferences of agents. To this end, by distinguishing between the gains in capital and income driven by variations in the agent's continuation payoff, we provide a theoretical model which overcomes the problem that the loss of utility arising from loss aversion disappears entirely with a continuous-time limit. We then show that the optimal contract includes part that is strictly positive but insensitive to the agent's continuation payoff, and part that encompasses a range of option-type payoffs. Implementing the optimal contract using a combination of equity, long-term debt, and a line of credit, we also predict that dividend payments are insensitive to changes in the firm's performance as long as its performance is moderately good. In addition, we derive some relations between dividends, the credit line balance (equity value), the limit of the credit line, and long-term debt. These results provide a unified explanation for the evolution of CEO compensation and corporate dividend-smoothing policy. The results also yield several predictions about dynamic capital structure in line with the empirical literature. In terms of robustness, the endogenous determination of the utility reference point does not greatly affect our main results.
Author: Hiroshi Osano
Publisher:
ISBN:
Category :
Languages : en
Pages : 62
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Book Description
We explore how the timings of compensation payment and contract termination are jointly and optimally determined in a continuous-time principal--agent model under the discretionary termination policy of investors (the principal) when the agent has loss--averse preferences. Our theoretical findings provide several new empirical implications for backloaded compensation and forced managerial turnover. Our model also shows that mandatory deferral regulation governing incentive pay induces investors to terminate the contract relation earlier and results in the more frequent replacement of managers.
Author: Zhiguo He
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
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.
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: Hersh Shefrin
Publisher: College Ie Overruns
ISBN: 9781259254864
Category : Corporations
Languages : en
Pages : 300
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Book Description
Author: Jakša Cvitanic
Publisher: Springer Science & Business Media
ISBN: 3642142001
Category : Mathematics
Languages : en
Pages : 258
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Book Description
In recent years there has been a significant increase of interest in continuous-time Principal-Agent models, or contract theory, and their applications. Continuous-time models provide a powerful and elegant framework for solving stochastic optimization problems of finding the optimal contracts between two parties, under various assumptions on the information they have access to, and the effect they have on the underlying "profit/loss" values. This monograph surveys recent results of the theory in a systematic way, using the approach of the so-called Stochastic Maximum Principle, in models driven by Brownian Motion. Optimal contracts are characterized via a system of Forward-Backward Stochastic Differential Equations. In a number of interesting special cases these can be solved explicitly, enabling derivation of many qualitative economic conclusions.
Author: Patrick Bolton
Publisher: MIT Press
ISBN: 9780262025768
Category : Business & Economics
Languages : en
Pages : 746
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Book Description
A comprehensive introduction to contract theory, emphasizing common themes and methodologies as well as applications in key areas. Despite the vast research literature on topics relating to contract theory, only a few of the field's core ideas are covered in microeconomics textbooks. This long-awaited book fills the need for a comprehensive textbook on contract theory suitable for use at the graduate and advanced undergraduate levels. It covers the areas of agency theory, information economics, and organization theory, highlighting common themes and methodologies and presenting the main ideas in an accessible way. It also presents many applications in all areas of economics, especially labor economics, industrial organization, and corporate finance. The book emphasizes applications rather than general theorems while providing self-contained, intuitive treatment of the simple models analyzed. In this way, it can also serve as a reference for researchers interested in building contract-theoretic models in applied contexts.The book covers all the major topics in contract theory taught in most graduate courses. It begins by discussing such basic ideas in incentive and information theory as screening, signaling, and moral hazard. Subsequent sections treat multilateral contracting with private information or hidden actions, covering auction theory, bilateral trade under private information, and the theory of the internal organization of firms; long-term contracts with private information or hidden actions; and incomplete contracts, the theory of ownership and control, and contracting with externalities. Each chapter ends with a guide to the relevant literature. Exercises appear in a separate chapter at the end of the book.
Author: Nancy L. Stokey
Publisher: Harvard University Press
ISBN: 0674735188
Category : Business & Economics
Languages : en
Pages : 607
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Book Description
This rigorous but brilliantly lucid book presents a self-contained treatment of modern economic dynamics. Stokey, Lucas, and Prescott develop the basic methods of recursive analysis and illustrate the many areas where they can usefully be applied.
Author: John S. Beasley
Publisher: Edward Elgar Publishing
ISBN: 1781005109
Category : Business & Economics
Languages : en
Pages : 553
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Book Description
Research on executive compensation has exploded in recent years, and this volume of specially commissioned essays brings the reader up-to-date on all of the latest developments in the field. Leading corporate governance scholars from a range of countries set out their views on four main areas of executive compensation: the history and theory of executive compensation, the structure of executive pay, corporate governance and executive compensation, and international perspectives on executive pay. The authors analyze the two dominant theoretical approaches – managerial power theory and optimal contracting theory – and examine their impact on executive pay levels and the practices of concentrated and dispersed share ownership in corporations. The effectiveness of government regulation of executive pay and international executive pay practices in Australia, the US, Europe, China, India and Japan are also discussed. A timely study of a controversial topic, the Handbook will be an essential resource for students, scholars and practitioners of law, finance, business and accounting.
Author: Mathias Dewatripont
Publisher:
ISBN:
Category : Agency (Law)
Languages : en
Pages : 68
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Book Description
