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.

We examine how strategic interaction in an industry influences the earnings expectations of financial analysts with regard to new product strategies. We find that following announcement of new products, analysts revise earnings forecasts upward more for announcing firms competing in low-strategic interaction industries than for firms competing in high-strategic interaction industries. For value-enhancing (value-reducing) product strategies, earnings forecast revisions are more favorable for rivals competing under a high (low) degree of strategic interaction than for rivals competing under a low (high) degree of strategic interaction. Overall empirical evidence indicates that the nature of strategic competition within the industry is important in assessing the market expectations of earnings for new product announcers and their rivals.