The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Marketable Incentive Contracts and Capital Structure Relevance
Published: 04/18/2012 | DOI: 10.1111/j.1540-6261.1997.tb03820.x
GERALD T. GARVEY
This article investigates the claim that debt finance can increase firm value by curtailing managers' access to “free cash flow.” We first show that incentive contracts that tie the managers' pay to stockholder wealth are often a superior solution to the free cash flow problem. We then consider the possibility that the manager can trade on secondary capital markets. Liquid secondary markets are shown to undermine management incentive schemes and, in many cases, to restore the value of debt finance in controlling the free cash flow problem.
Incentive Compensation When Executives Can Hedge the Market: Evidence of Relative Performance Evaluation in the Cross Section
Published: 07/15/2003 | DOI: 10.1111/1540-6261.00577
Gerald Garvey, Todd Milbourn
Little evidence exists that firms index executive compensation to remove the influence of marketwide factors. We argue that executives can, in principle, replicate such indexation in their private portfolios. In support, we find that market risk has little effect on the use of stock‐based pay for the average executive. But executives' ability to “undo” excessive market risk can be hindered by wealth constraints and inalienability of human capital. We replicate the standard result that there is little relative performance evaluation (RPE) for the average executive, but find strong evidence of RPE for younger executives and executives with less financial wealth.
Capital Structure and Corporate Control: The Effect of Antitakeover Statutes on Firm Leverage
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00116
Gerald T. Garvey, Gordon Hanka
We find that firms protected by “second generation” state antitakeover laws substantially reduce their use of debt, and that unprotected firms do the reverse. This result supports recent models in which the threat of hostile takeover motivates managers to take on debt they would otherwise avoid. An implication is that legal barriers to takeovers may increase corporate slack.