Journal article
Managerial compensation and the underinvestment problem
Abstract
This paper studies the effect of managerial compensation terms on the well-known “underinvestment” incentive. We extend the Mauer and Ott (2000) real-option model of corporate expansion, and show that, when the manager maximizes the value of his compensation package (rather than equity value), the underinvestment problem can be substantially mitigated. Further, by designing an appropriate compensation contract, it is possible to eliminate the …
Authors
Kanagaretnam K; Sarkar S
Journal
Economic Modelling, Vol. 28, No. 1-2, pp. 308–315
Publisher
Elsevier
Publication Date
January 2011
DOI
10.1016/j.econmod.2010.08.017
ISSN
0264-9993