DP2643 Managerial Compensation and the Market Reaction to Bank Loans

Author(s): Andres Almazan, Javier Suarez
Publication Date: December 2000
Keyword(s): Banks, Managerial Compensation, Monitoring, Optimal Contracts
JEL(s): G32, G34
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2643

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.