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We investigate the relationship between CEO performance pay incentives and firm productivity. In general, we find an inverse U-shaped relationship between productivity and the sensitivity of CEO wealth to share value (delta) and a positive relationship between productivity and the sensitivity of CEO option wealth to stock return volatility (vega). Thus, a high delta associated with CEO risk-aversion lowers productivity, but a high vega from stock options offsets this effect. In looking at delta and vega jointly, we also find that options do not always achieve their intended purpose. These results are stronger among firms that are weakly governed or when high transaction costs prevent the writing of an optimal compensation contract.JEL codes: G32, G30, L2, O3 Keywords: CEO, Executive Compensation, Pay-for-Performance Sensitivity, Productivity * Bulan and Sanyal: Brandeis University, International Business School and Economics Department, 415 South Street, MS 021, Waltham, MA 02454. Yan: New Jersey Institute of Technology, School of Management, University Heights, Newark, NJ 07102. This paper has benefitted tremendously from the comments and suggestions of an anonymous referee. We also are grateful to

We identify firms according to two life cycle stages, namely growth and maturity, and test the pecking order theory of financing. We find a strong maturity effect, i.e. the pecking order theory describes the financing behavior of mature firms better than growth firms. Our findings show that firm maturity is an alternative proxy for debt capacity. In particular, mature firms are older, more stable and highly profitable with good credit histories. Thus, they naturally have greater debt capacity. After controlling for firm maturity, the pecking order theory describes the financing behavior of firms fairly well.

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