An Agency Theoretic Approach To Executive Compensation: Tests Of Dichotomous Contract Theory

Abstract

This study analyses properties and implications of managerial contractual arrangements within the framework of Harris and Raviv’s theory of dichotomous contracts. This study tests the efficacy of using component reporting of executive compensation contracts as an imperfect estimator or executive performance. Evidence suggests magnitude of profitability is a contributing factor, percentage change in profitability varies between groups, and disclosure of the separate components of compensation provides no useful information based on the risk-adjusted abnormal returns.