We develop a model to illustrate that employee compensation and product market decisions are related. When the product market is competitive and employees have low bargaining power, the unique equilibrium in our setting is for each firm's owners to offer equity-based compensation to their...

Extant research argues that borrowing from financial intermediaries subjects managers to external monitoring. However, given managers' flexibility in choosing the type of debt financing, why would managers submit themselves to external monitoring? Recent theory points to the role of managerial...