Common Ownership, Competition, and Top Management Incentives
87 Pages Posted: 3 Jul 2016 Last revised: 22 Sep 2020
Date Written: June 1, 2018
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
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