Executive Incentive Plans, Corporate Control, and Capital Structure

Mehran, Hamid

doi:10.2307/2331139

Cited by 311 publications

(223 citation statements)

References 54 publications

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“…We find R = 0.1293, or 12.93% which is low compared to empirical findings where recovery ratios for unsecured senior debt varies around 45%. 44 However, as has been noted in the previous section, we 41 This is in line with empirical results from Mehran (1992) who finds a positive relationship between leverage and the management compensation tied to performance. 42 We do not consider the case when managers own more than 50% of the firm, since otherwise managers would have the majority of the voting power and would be able to implement their optimal leverage levels.…”

Section: Optimal Couponsupporting

confidence: 81%

Informational Asymmetry Between Managers and Investors in the Optimal Capital Structure Decision

Bank

Lawrenz

2005

SSRN Journal

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In this article, we consider the impact of asymmetric information between managers and investors on the optimal capital structure decision. This is done within a continuous-time framework, where the relevant state variable is given by the EBIT value of the firm; an approach taken by (2004) amongst others. Our setup differs in that we assume the EBIT to follow an Arithmetic Brownian motion, i.e. it can assume negative values. More importantly, we extend this framework in two directions: (i) We introduce a separate management claim. (ii) We introduce asymmetric information between managers and investors by assuming that claimants receive noisy signals, which they process according to rational expectation principles.Our results show, that managers always try to avoid debt, and that their optimal bankruptcy threshold is always lower, than the threshold set by equity holders. The introduction of asymmetric information changes the optimality conditions, and consequently the capital structure decision. It is shown, that the informational asymmetry can substantially lower the optimal leverage ratio, even without assuming that managers are entrenched.

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Section: Optimal Couponsupporting

confidence: 81%

Informational Asymmetry Between Managers and Investors in the Optimal Capital Structure Decision

Bank

Lawrenz

2005

SSRN Journal

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“…9 This feature of ESOs makes them a useful tool for reducing employee turnover. Mehran and Yermack (1999) document that the probability of a voluntary departure by a CEO is inversely related to the length of the stock option vesting schedule. They also document that the higher the ratio of deferred compensation to current pay, the less likely a CEO is to leave voluntarily.…”

Section: Accounting For Stock Optionsmentioning

confidence: 99%

“…Monitoring may become difficult when a firm has significant growth opportunities. Information asymmetries may arise from these opportunities which make evaluating the managers' investment choices more difficult [e.g., Mehran (1992), Smith & Watts (1992) and Bizjak et al (1993)]. Stronger incentives, then, are needed to compensate for the monitoring difficulties.…”

Section: Determinants Of Stock Option Grantsmentioning

confidence: 99%

The Impact of Employee Stock Options on the Evolution of Compensation in the 1990s

Mehran¹,

Tracy²

2001

Self Cite

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“…Additionally, many empirical studies have attempted to analyze the impact of corporate governance practices on capital structure decisions (Friend and Lang, 1988;Berger et al, 1997;Mehran, 1992). However, capital structure of the transportation firms, substantially shipping and aviation, have rarely been investigated so far (Gritta, 1979;Capobianco and Fernandes, 2004;Arvanitis et al, 2012;Drobetz et al, 2013).…”

Section: Introductionmentioning

confidence: 99%