A model of dynamic compensation and capital structure
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.
Year of publication: |
2011
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Authors: | He, Zhiguo |
Published in: |
Journal of Financial Economics. - Elsevier, ISSN 0304-405X. - Vol. 100.2011, 2, p. 351-366
|
Publisher: |
Elsevier |
Keywords: | Continuous-time contracting Capital structure CARA (exponential) preference Firm growth Size-heterogeneity Pay-performance sensitivity |
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