Paper Title

Abstract: This article investigates the influence of managerial compensation and reservation income on investment timing, endogenous default, yield spreads and capital structure. In contrast to well-known models settingwhich usually assume the revenue generated by the project follows an ordinary geometric Brownian motion, we built our framework under the assumption that project revenue follows a more relevant mean-reverting process. Since the mean-reverting process is proven by a lot of empirical articles to be a more suitable assumption for firms‟ revenue, discussing managerial compensation related topics under this assumption seems to be more practical and interesting. Except for mean-reverting issue, we also investigate managerial compensation and firm‟s investment issues under the condition of debt issuance financial constraints. We find that high mean reversion speed of revenue process reduces the revenue variance which leads to the lower values of projects or option values for waiting to invest and its investment trigger threshold. Higher long-term revenue value makes the project or firm value profitable and makes both agency cost of debt in manager and equity-holder decrease. We find that the U-shape of investment trigger as a function of the debt-financing constraints is not significant under mean-reverting revenue setting of the proposed model. When a firm faces financing constraints, the situation that firm‟s manager with high reservation income would adopt low leverage and firm‟s manager with high manager‟s share ownership would adopt aggressive high leverage is no longer true. Keywords - Agency Conflicts, Mean-Reverting, Managerial Compensation, Debt-Financing Constraint