Executive Incentives and Financial Constraints

摘要

In this paper, we theoretically and empirically analyze the effects of firm-level financial con- straints on executive compensation. The existing corporate finance literature highlights that financial constraints affect corporate behavior. The apparent difficulty in managing financially constrained firms suggests that shareholders in constrained firms should use higher-powered compensation contracts than those in unconstrained firms. In the framework of a standard principal-agent model, we show a negative relation between pay-performance sensitivities and better access to the capital markets. Empirical results demonstrate that CEO pay-performance sensitivities in financially constrained firms are statistically and economically higher than the pay-performance sensitivities in financially unconstrained firms. Moreover, we find that the total value of CEO's compensation package is higher in constrained firms than in unconstrained firms.