Common Ownership, Competition, and Top Management Incentives

Abstract

We present a mechanism based on managerial incentives through which common ownership affects product market outcomes. Consistent with empirical evidence, firm-level variation in common ownership causes variation in managerial incentives and productivity \emph{across firms}, as well as \emph{intra-industry} and \emph{intra-firm cross-market} variation in prices, output, markups, and market shares—all without communication between shareholders and firms, coordination between firms, knowledge of shareholders' interests, or market-specific interventions by top managers. The organizational structure of firms and the passivity of common owners determine whether the anticompetitive price effect of common ownership results from higher costs or from higher markups. Using panel regressions and a difference-in-differences design we document that managerial incentives are less performance-sensitive in firms whose investors hold greater stakes in competitors.

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

JEL Classification: M12, L13, J33, G32, D21, L21