Journal of Financial Economics Vol. 100 No. 2 2011
A model of dynamic compensation and capital structure☆
Abstract
This paper studies the optimal compensation problem between shareholders and the agent in the Leland (1994) capital structure model, and finds that the debt-overhang effect on the endogenous managerial incentives lowers the optimal leverage. Consistent with 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.
- DOI
- 10.1016/j.jfineco.2011.01.005
- Volume
- 100
- Issue
- 2
- Pages
- 351-366
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref