Journal of Financial Intermediation Vol. 2 No. 3 1992
Risk, managerial effort, and project choice
Abstract
In our model risk-neutral shareholders need to motivate a manager to select among projects with different risks, and to work hard in implementing the chosen project. Curvature of the manager's compensation contract as a function of profit affects his attitude toward project risk. The optimal curvature depends on the trade-off between controlling project risk and motivating effort. The analysis predicts greater option-based compensation when there are desirable risky growth opportunities (proxied by Tobin's q or R&D expenditures) and less option compensation when there are effective monitoring institutions (such as outside directors and bank lenders).
- DOI
- 10.1016/1042-9573(92)90004-w
- Volume
- 2
- Issue
- 3
- Pages
- 308-345
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib