Author: | McConaughy, D. L. Mishra, C. S. |
Title: | Debt, performance-based incentives and firm performance |
Journal: | Financial Management
1996 : SUMMER, VOL. 25:2, p. 37-51 |
Index terms: | COMPANY PERFORMANCE DEBT SHARE PRICES |
Language: | eng |
Abstract: | We identify conditions of prior performance and pay-performance sensitivity under which an increase in incentives is associated with improved performance. We find that increasing sensitivity increases risk-adjusted performance in firms with poor prior performance, but has little impact on high-performance firms. We also observe that firms choose higher pay-performance sensitivity when the probability of wealth transfers to bondholders is high. Pay-performance sensitivity to stock prices is important. If carefully implemented under the appropriate conditions, it can provide effective incentives for improving firm performance. |
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