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Dealing with Overleverage: Restricting Leverage vs. Restricting Variable Compensation

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dc.contributor.authorGete, Pedro
dc.contributor.authorGómez, Juan Pedro
dc.contributor.rorhttps://ror.org/02jjdwm75
dc.date.accessioned2025-02-11T15:39:07Z
dc.date.available2025-02-11T15:39:07Z
dc.date.issued2018-01-25
dc.description.abstractWe study policies that regulate executive compensation in a model that jointly determines executives' effort, compensation and firm leverage. The market failure that justifies regulation is that executives are optimistic about asset prices in states of distress. We show that shareholders propose compensation packages that lead to socially excessive leverage. Say-on-pay regulation does not reduce the incentives for leverage. Regulating the structure of compensation (but not its level) with a cap on the ratio of variable-to-fixed pay delivers the right leverage. However, it is more efficient to directly regulate leverage because restricting the variable compensation impacts managerial effort more than if shareholders are free to design compensation subject to a leverage constraint.
dc.description.peerreviewedyes
dc.description.statusPublished
dc.formatapplication/pdf
dc.identifier.citationGete, Pedro and Gomez, Juan-Pedro, Dealing with Overleverage: Restricting Leverage vs. Restricting Variable Compensation (June 1, 2017). The Quarterly Journal of Finance, volume 8(1), 1-29, http://dx.doi.org/10.2139/ssrn.2527836
dc.identifier.doihttp://dx.doi.org/10.2139/ssrn.2527836
dc.identifier.issn2010-1406
dc.identifier.urihttps://hdl.handle.net/20.500.14417/3537
dc.issue.number1
dc.journal.titleQuarterly Journal of Finance
dc.language.isoen
dc.page.final29
dc.page.initial1
dc.page.total29
dc.publisherSSRN
dc.relation.departmentFinance
dc.relation.entityIE University
dc.relation.schoolIE Business School
dc.rightsAttribution 4.0 International
dc.rights.accessRightsinfo:eu-repo/semantics/openAccess
dc.rights.urihttps://creativecommons.org/licenses/by/4.0/
dc.subject.keywordCompensation Design
dc.subject.keywordMacroprudential Regulation
dc.subject.keywordOverborrowing
dc.subject.keywordMoral Hazard
dc.titleDealing with Overleverage: Restricting Leverage vs. Restricting Variable Compensation
dc.typeinfo:eu-repo/semantics/article
dc.version.typeinfo:eu-repo/semantics/acceptedVersion
dc.volume.number8
dspace.entity.typePublication
relation.isAuthorOfPublication627e06b8-d61f-4611-96fe-15cf32670e9f
relation.isAuthorOfPublication4c2d4d21-bbf8-4935-96bc-6475146ceea7
relation.isAuthorOfPublication.latestForDiscovery627e06b8-d61f-4611-96fe-15cf32670e9f
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