A model of dynamic compensation and capital structure

作者：He Zhiguo^*

来源：Journal of Financial Economics, 2011, 100(2): 351-366.

DOI：10.1016/j.jfineco.2011.01.005

• Continuous-time contracting
• Capital structure
• CARA (exponential) preference
• Firm growth
• Size-heterogeneity
• Pay-performance sensitivity

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. Published by Elsevier B.V.

• 出版日期2011-5