Setting Incentives for Managers: Incentive Compatibility, Similarity Rule, and Goal Congruence

Trost, Ralf; Heim, Sebastian

doi:10.1007/978-3-319-61603-2_1

Cited by 2 publications

(1 citation statement)

References 22 publications

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“…From the results of the study, the incentives proposed by the debtholder includes the provision of a lower and more consistent cost of debt as well as more debt facility for the company. These are described as a fair distribution of the gains from cooperation (Trost and Heim, 2018). The relationship between the company's cost of debt, new debt and market value of debt was linear in the Pareto case but non-linear in the non-cooperative case.…”

Section: Nikooeinejadmentioning

confidence: 99%

Optimal capital structure and the debtholder-manager conflicts of interests: a management decision model

Adeoye

Islam

Adekunle

2020

JM2

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Purpose Determining the optimal capital structure becomes more complicated by the presence of an agency problem. The issuance of debt as a corporate governance mechanism introduces the asset substitution problem – the agency cost of debt. Thus, there is a recognized need for models that can resolve the agency problem between the debtholder and the manager who acts on behalf of the shareholder, leading to optimal capital structure choice, and enhanced firm value. The purpose of this paper is to model the debtholder-manager agency problem as a dynamic game, resolve the conflicts of interests and determine the optimal capital structure. Design/methodology/approach As there is no satisfactory model for dealing with the above issues, this paper uses a differential game framework to analyze the incongruity of interests between the debtholder and the manager as a non-cooperative dynamic game and further resolves the conflicts of interests as a cooperative game via a Pareto-efficient outcome. Findings The optimal capital structure required to minimize the marginal cost of the agency problem is a higher use of debt, lower cost of equity and withheld capital distributions. The debtholder is also able to enforce cooperation from the manager by providing a lower and stable cost of debt and a greater debt facility in the overtime framework. Originality/value The study develops a new dynamic contract theory model based on the integrated issues of capital structure, corporate governance and agency problems and applies the differential game approach to minimize the agency problem between the debtholder and the manager.

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Section: Nikooeinejadmentioning

confidence: 99%