Managerial compensation and the agency costs of debt finance
Version of Record online: 10 NOV 2006
Copyright © 1992 John Wiley & Sons, Ltd.
Managerial and Decision Economics
Volume 13, Issue 1, pages 55–64, January/February 1992
How to Cite
Brander, J. A. and Poitevin, M. (1992), Managerial compensation and the agency costs of debt finance. Manage. Decis. Econ., 13: 55–64. doi: 10.1002/mde.4090130107
- Issue online: 10 NOV 2006
- Version of Record online: 10 NOV 2006
This paper presents a model of the agency costs of debt finance, based on the conflict of interest between shareholders and bondholders. We show how the terms of the compensation contract offered to management by shareholders can reduce these agency costs. We derive a managerial compensation contract that restores the first-best outcome and leads to a local irrelevance result for financial structure. More generally, the model points out that the nature of managerial compensation contracts will affect the firm's optimal financial structure, and offers a reason why managerial compensation is typically not closely correlated with shareholder returns.