Capital structure and executive compensation contract design: A theoretical and empirical analysis

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)

Abstract

Compensation contracts including incentive instruments not only provide executives with positive incentives to increase shareholder wealth, but also create a negative value-dilution effect for existing shareholders. This study investigates this dilemma by conducting a benefit-cost analysis under a proposed structural form valuation framework. Our design mechanism shows that, given their firms' current capital structure, shareholders are always capable of designing an optimal compensation contract to maximize their wealth. Due to the different research issue and assumptions, unlike findings of most previous studies, our model proposes that in a firm with a higher leverage ratio shareholders should provide a contract with higher incentive intensity for managers, and this proposition is supported by the empirical analyses which examine the sample of S&P index firms over the period 1992-2006 after adopting an updated fixed effects model.

Original languageEnglish
Pages (from-to)209-224
Number of pages16
JournalJournal of Banking and Finance
Volume36
Issue number1
DOIs
Publication statusPublished - 2012 Jan 1

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Capital structure and executive compensation contract design: A theoretical and empirical analysis'. Together they form a unique fingerprint.

Cite this