Common Ownership, Competition, and Top Management Incentives

Abstract

This paper presents a mechanism based on managerial compensation through which common ownership can affect product market outcomes. We embed a canonical managerial incentive design problem in a model of strategic product market competition under common ownership. Consistent with empirical evidence, firm-level variation 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, knowledge of shareholders' incentives, or market-specific interventions by top managers. We provide empirical evidence consistent with the theoretical prediction that top management incentives are less performance-sensitive in firms whose large investors hold greater ownership stakes in industry competitors.

Keywords: Common ownership, competition, managerial incentives, corporate governance, antitrust

JEL Classification: M12, L13, J33, G32, D21