Date of Award
8-18-2008
Degree Type
Dissertation
Degree Name
Doctor of Philosophy (PhD)
Department
Finance
First Advisor
Jayant Kale - Chair
Second Advisor
Anastasia V. Kartasheva
Third Advisor
Omesh Kini
Fourth Advisor
Harley E. Ryan
Abstract
This paper proposes that managerial incentive compensation affects the firm choice between public and bank debt. To motivate the case I analyze a simple model with complete and perfect information that implies a positive relation between managers’ incentive compensation and preference toward bank debt. Using firm-level data over the period 1992-2005, I empirically examine the relation between managerial incentives and financing decisions. Specifically, I examine whether managers whose compensation is tied to firm performance choose bank over public debt as a commitment mechanism to reduce the cost of debt. Consistent with a monitoring role of banks, I find that the probability of choosing bank over public debt is positively related to the level of incentive compensation. Further, I find that public lenders price the incentive alignment between manager and shareholders by increasing the cost of debt, while the overall cost of bank loan does not depend on the manager’s incentive compensation. Finally, I find that banks are more likely to include a collateral provision in the debt contract if the manager’s compensation is tied to firm performance.
DOI
https://doi.org/10.57709/1059008
Recommended Citation
Meneghetti, Costanza, "Managerial Incentives and the Choice between Public and Private Debt." Dissertation, Georgia State University, 2008.
doi: https://doi.org/10.57709/1059008