There is an ongoing theoretical debate about whether firm-owners would optimally use stronger or weaker incentive schemes for their managers as productmarket competition increases. Schmidt (1997) shows that the outside options of the managers play a crucial role: if the market for managers is...

There is strong empirical evidence that firms do not always adjust their capital structure according to established capital structure theories. Rather, they follow a passive strategy such that capital structure changes are mainly driven by their stock returns. This paper investigates to what...