Common Ownership, Competition, and Top Management Incentives

Abstract

This paper proposes a firm-level mechanism through which common ownership can affect product market outcomes consistent with empirical evidence. We embed a canonical managerial incentive design problem in a model of strategic product market competition under common ownership. Firm-level variation over time in common ownership causes variation in managerial incentives across firms as well as variation in product prices, market shares, concentration, and output across markets---all without communication between shareholders and firms, coordination between firms, or market-specific incentives for managers. Empirical analysis of managerial compensation confirms the theoretical prediction that top management incentives are less performance-sensitive in firms where large investors hold more shares in competitors.

Keywords: Common ownership, competition, CEO pay, management incentives, governance

JEL Classification: D21, G30, G32, J31, J41