Common Ownership, Competition, and Top Management Incentives

When one firm's strategy affects other firms' value, optimal executive incentives depend on whether shareholders have interests in only one or in multiple firms. Performance-sensitive contracts induce managerial effort to reduce costs, and lower costs induce higher output. Hence, greater managerial effort can lead to lower product prices and industry profits. Therefore, steep managerial incentives can be optimal for a single firm and at the same time violate the interests of common owners of several firms in the same industry. Empirically, managerial wealth is more sensitive to performance when a firm's largest shareholders do not own large stakes in competitors.

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

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

Suggested Citation: Suggested Citation

Anton, Miguel and Ederer, Florian and Gine, Mireia and Schmalz, Martin C., Common Ownership, Competition, and Top Management Incentives (June 1, 2018). Ross School of Business Paper No. 1328; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 511/2017. Available at SSRN: https://ssrn.com/abstract=2802332 or http://dx.doi.org/10.2139/ssrn.2802332

Miguel Anton

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Florian Ederer

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States

HOME PAGE: http://faculty.som.yale.edu/florianederer/

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Mireia Gine

IESE Business School, University of Navarra ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

The University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

Martin C. Schmalz (Contact Author)

University of Oxford - Finance ( email )

United States

CEPR ( email )

London
United Kingdom

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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