Agency theory suggests that high pay-performance sensitivity (PPS) of CEO's compensation is an important motivation mechanism to the CEO to improve corporate performance. We develop a simple model that suggests that reverse causality should also be considered. Specifically, our model predicts...

Several countries have implemented bonus taxes for corporate executives in response to the current financial crisis. Using a principal-agent model, this paper investigates the incentive effects of bonus taxes by analyzing the agent's and principal's behavior. Specifically, we show how bonus...

We consider the problem of an employer who has to choose whether to reemploy agents with a positive track record or agents who were unsuccessful. While previously successful managers are likely to be of high ability, they have also accumulated wealth and will be harder to motivate in the future....

Classic financial agency theory recommends compensation through stock options rather than shares to counteract excessive risk aversion in agents. In a setting where any kind of risk taking is suboptimal for shareholders, we show that excessive risk taking may occur for one of two reasons: risk...

The debate on employee representation on corporate boards has received considerable attention from scholars and politicians around the world. We provide new insights to this ongoing discussion by applying power indices from game theory to examine the actual voting power of employees on boards...

Recent revisionist accounts of corporate governance in both business history and finance are challenging the tradition narrative, associated with Berle and Means (1932) and Chandler (1977), in which the American model of diffuse ownership and coherent diversification is both an inevitable...