Real options and earnings-based bonus compensation

Hsing Hua Huang, Hongming Huang, Pai Ta Shih

Research output: Contribution to journalArticlepeer-review

5 Scopus citations


This study extends the works of Mauer and Sarkar (2005) and Andrikopoulos (2009) by incorporating a regime-dependent earnings-based bonus into managerial compensation. Examining the individual effects of ownership shares and earnings-based bonus compensation, we find that the former provides managers with incentives to issue debt, whereas the latter induces the opposite result, although consistent impacts are found for the two types of compensation on both agency costs and the optimal investment decisions of managers. When managerial compensation comprises both ownership shares and an earnings-based bonus, there are significant differences in the effects of these two types of performance compensation on managers' optimal investment and financing decisions, agency costs, optimal debt ratios and credit spreads, as a result of the specific interactions between the investment and financing decisions.

Original languageEnglish
Pages (from-to)2389-2402
Number of pages14
JournalJournal of Banking and Finance
Issue number8
StatePublished - Aug 2012


  • Capital structure
  • Earnings-based bonus compensation
  • Ownership shares compensation
  • Real options


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