This paper is a theoretical and empirical analysis of two mechanisms to monitor management: debt financing and incentive-based compensation. Under agency theory, both mechanisms are used to restrict the amount of managerial opportunistic behavior, with the goal of aligning the interests of shareholders and management. This paper hypothesizes that these two mechanisms are substitutes, wherein we would expect a negative relationship between the amount of incentive compensation within the CEO’s compensation structure, and the amount of debt financing within a firms capital structure. This study tests using a 3SLS model to account for endogeneity, the impact both monitoring mechanisms have on each other, in addition to firm performance. This study uses a comprehensive dataset of 458 manufacturing firms to test the hypothesis. The results indicate that there is no evidence to suggest that incentive compensation and debt are substitutes to align shareholder and managerial interests.


Sell, John


Business Economics


Business Administration, Management, and Operations | Corporate Finance | Finance and Financial Management | Organizational Behavior and Theory | Strategic Management Policy


Debt, Compensation Structure, Governance

Publication Date


Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis



© Copyright 2016 Jack D. Crawley