Agency Costs of Equity and Debt, and Corporate Incentive Compensation Policy: The French Case

Abstract

According to the predictions of contract theory, the integration of stock options as well as restricted stocks into the overall executives‟ compensation may reduce the conflicts between the shareholders and the management but may at the same time give rise to other agency problems connected to debt. Such conflicts can as much affect management and the shareholders as the latter and corporate creditors. The aim of this paper is to analyse the relationships between incentive compensation (stock options and restricted stocks) and the agency costs of equity and debt. On the basis of data on the executives‟ compensation of 93 listed French companies for the period from 2002 to 2008, our results demonstrate a predominance of agency costs of equity over those related to debt when providing a justification for the use of incentive remuneration within French companies.