Capital structure and executive compensation contract design: A theoretical and empirical analysis |
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Authors: | Hsuan-Chu Lin Wen-Gine Wang |
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Institution: | a Graduate Institute of Banking and Finance, College of Management, National Cheng Kung University, Tainan 70101, Taiwan b Department of Accounting and Information Technology, College of Management, National Chung Cheng University, Chiayi 62102, Taiwan |
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Abstract: | Compensation contracts including incentive instruments not only provide executives with positive incentives to increase shareholder wealth, but also create a negative value-dilution effect for existing shareholders. This study investigates this dilemma by conducting a benefit-cost analysis under a proposed structural form valuation framework. Our design mechanism shows that, given their firms’ current capital structure, shareholders are always capable of designing an optimal compensation contract to maximize their wealth. Due to the different research issue and assumptions, unlike findings of most previous studies, our model proposes that in a firm with a higher leverage ratio shareholders should provide a contract with higher incentive intensity for managers, and this proposition is supported by the empirical analyses which examine the sample of S&P index firms over the period 1992-2006 after adopting an updated fixed effects model. |
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Keywords: | G32 J33 |
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