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Performance-based bonuses for investment and abandonment decisions

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  • Kim, Hwa-Sung

Abstract

This paper examines whether a performance-based bonus for a manager’s investment influences her abandonment decision. First, we derive optimal performance-based bonuses for investment and abandonment decisions. Second, we show that there could be a discrepancy between the managers abandonment timing and that of the shareholders, even though an appropriate performance-based bonus was compensated to mitigate agency conflicts in the investment decision. Third, we also show that as long as the manager is contracted to receive the optimal performance-based bonus for the abandonment decision, only the effort costs that she incurs affect the abandonment timing.

Suggested Citation

  • Kim, Hwa-Sung, 2016. "Performance-based bonuses for investment and abandonment decisions," Finance Research Letters, Elsevier, vol. 18(C), pages 120-126.
    • Handle: RePEc:eee:finlet:v:18:y:2016:i:c:p:120-126
    DOI: 10.1016/j.frl.2016.04.009
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    References listed on IDEAS

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    1. Bart M. Lambrecht & Stewart C. Myers, 2007. "A Theory of Takeovers and Disinvestment," Journal of Finance, American Finance Association, vol. 62(2), pages 809-845, April.
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    Cited by:

    1. Niu, Yingjie & He, Linfeng & Wu, Wei, 2021. "Managerial compensation with hyperbolic discounting," Finance Research Letters, Elsevier, vol. 38(C).

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    More about this item

    Keywords

    Real option; Investment decision; Abandonment decision; Agency problem; Performance-based bonus;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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