Working Paper: CEPR ID: DP2643
Authors: Andres Almazan; Javier Suarez
Abstract: This Paper considers why a manager would choose to submit himself to the discipline of bank monitoring. This issue is analysed within the context of a model where the manager enjoys private benefits, which can be restricted by the monitor, and is optimally compensated by shareholders. Within this setting, we find that managers will submit to monitoring when they receive favourable private information. This result is consistent with event study evidence that suggests that the market has a favourable view of financing choices that increase monitoring.
Keywords: banks; managerial compensation; monitoring; optimal contracts
JEL Codes: G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| favorable private information (D82) | bank monitoring (G21) |
| bank monitoring (G21) | manager's temptation to misbehave (D22) |
| bank financing (G21) | pay-performance sensitivities (J33) |
| bank loan announcements (G21) | firm's stock price (G12) |