Reference
Fahim, Arash, Simon Gervais, and R. Vijay Krishna, “Monitoring in Dynamic Financial Contracts,” Duke University, Working Paper.
Abstract
A principal hires an agent to run a firm. The principal determines not only the compensation and termination time of the agent, but also the monitoring intensity. The optimal contract treats pay incentives and monitoring as substitutes. Interestingly, the relationship between firm performance and monitoring intensity is non-monotonic: monitoring intensity increases (decreases) after periods of good performance for firms with low (high) financial slack. When the contract is implemented with financial claims, we show that more productive firms or those with less severe agency problems feature higher stock prices, lower credit yield spreads and, crucially, greater levels of monitoring.
Links
| Paper | Slides |
