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.
Crawley, Jack D., "The Substitutability of Debt Financing and Incentive Compensation in Aligning the Interests of the Firm: A Theoretical and Empirical Study" (2016). Senior Independent Study Theses. Paper 7219.
Business Administration, Management, and Operations | Corporate Finance | Finance and Financial Management | Organizational Behavior and Theory | Strategic Management Policy
Debt, Compensation Structure, Governance
Bachelor of Arts
Senior Independent Study Thesis
© Copyright 2016 Jack D. Crawley