[PDF] Managerial Incentives And Capital Structure eBook

Author : Christian M. Pfeil
Publisher : Peter Lang Gmbh, Internationaler Verlag Der Wissenschaften
Page : 0 pages
File Size : 50,99 MB
Release : 2002
Category : Capital investments
ISBN : 9783631385746

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What factors determine a firm's financing decision? Informational economics and contract theory have contributed a great deal to answer this question. This book contains three essays that further contribute to this strand of literature with the focus on theories that view capital structure as a disciplining instrument for a self-interested management. Some of the existing theories abstract from other disciplining devices such as ordinary incentive wages to justify debt as a mean to mitigate a moral hazard problem between managers and owners of a firm. Two of the models presented here turn to the question of whether debt can play a role as an incentive device when other incentive mechanisms are available as well. A third model revisits the signaling literature on capital structure in the light of new empirical evidence. All models are embedded into a corporate governance framework that allows to set the conclusions into a broader perspective.

Author : Jouahn Nam
Publisher :
Page : pages
File Size : 17,16 MB
Release : 2003
Category :
ISBN :

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In this study we use estimates of the sensitivities of managers' portfolios to stock return volatility and stock price to directly test the relationship between managerial incentives to bear risk and two important corporate decisions. We find that as the sensitivity of managers' stock option portfolios to stock return volatility increases firms tend to choose higher debt ratios and make higher levels of Ramp;D investment. These results are even stronger in a sub sample of firms with relatively low outside monitoring. For these firms managerial incentives to bear risk play a particularly pivotal role in determining leverage and Ramp;D investment.

Author : Yilei Zhang
Publisher :
Page : 40 pages
File Size : 50,29 MB
Release : 2013
Category :
ISBN :

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This paper investigates the influence of managerial incentives on the capital structure decision using a sample of all-equity firms. Managerial risk-taking incentives may encourage financial risk taking hence greater leverage. On the other hand, increasing a manager's incentive to take risk increases the agency cost of debt and therefore lowers debt capacity. I provide evidence supporting the second effect in all-equity firms where the potential asset substitution is more severe. I show that CEO's pay-for-performance sensitivity (delta) and the sensitivity of CEO wealth to stock volatility (vega) are higher in all-equity firms than those in matched levered firms. In addition, the incentive compensation in all-equity firms encourages greater risk-taking activities than levered firms, suggesting a negative relation between leverage and risk taking incentives. I also find that the likelihood of having an all-equity capital structure increases in the risk taking incentives from managerial equity-based compensation. This remains after controlling for endogeneity, which may arise if overcoming managerial risk aversion is particularly important for these all-equity firms. Finally, I find that equity-based compensation and incentives decrease upon firms' switching to levered firms from all-equity firms, indicating the change of compensation structure is associated with the change of capital structure.

Author : Xiaodong Xu
Publisher :
Page : 28 pages
File Size : 38,50 MB
Release : 2005
Category :
ISBN :

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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.