Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/81885 
Year of Publication: 
2007
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 207
Publisher: 
Sveriges Riksbank, Stockholm
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.
Subjects: 
Managerial Compensation
Financial Structure
Monitoring
Diversification
JEL: 
G32
M12
Document Type: 
Working Paper

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