Externally mediated outcomes are frequently used to encourage managers to enhance their performance. The literature argues that performance-contingent rewards, and especially financial ones, have a motivating effect on performance. One presumption is that differences in pay levels are...

This paper provides a formal analysis of how managerial investment incentives are affected by alternative allocation rules when managerial compensation is based on accounting measures of income that include allocations for investment expenditures. The main result is that there exists a unique...

Suppose risk-averse managers can hedge the aggregate component of their exposure to firm's cash flow risk by trading in financial markets, but cannot hedge their firm-specific exposure. This gives them incentives to pass up firm-specific projects in favor of standard projects that contain...

We investigate whether the flexibility in making contributions towards defined benefit pension plans sponsored by firms in the United States allows managers to save cash and increase investments. Firms invest more at higher levels of pension deficit, defined as pension benefit obligations less...

This study analyzes how promotion-based tournament incentives for non-CEO senior executives affect corporate innovation. We measure tournament incentives using the pay gap between a CEO and the next layer of senior executives. We find that tournament incentives are positively related to...

This paper investigates the impact of managerial compensation on the likelihood of covenant violations and reports that higher CEO risk-shifting incentives significantly increase the likelihood of covenant violations. Evidence suggests that CEOs with creditor unfriendly compensation in leveraged...

We provide new evidence that equity incentives can have perverse effects on firm value. Conditioning the relationship between chief executive officer (CEO) incentives and the risk exposure generated by corporate policy decisions on how risk is expected to affect firm value, we find that delta...

Traditional finance theory suggests that riskier investments should yield higher returns. Challenging this notion, anecdotal and empirical evidence suggests that highly-incented managers may take on excessive risk, leading to greater losses, while other theoretical research argues that high...

This paper provides empirical evidence of a strong relation between the structure of managerial compensation and both investment policy and debt policy. Higher sensitivity of CEO wealth to stock volatility (vega) is associated with riskier policy choices, including relatively more investment in...