Common Ownership, Competition, and Top Management Incentives

Abstract

This paper presents a mechanism through which common ownership affects product market outcomes. We embed a 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 intra-industry cross-market variation in prices, market shares, concentration, and output—all without communication between shareholders and firms, coordination between firms, knowledge of shareholders' incentives, or market-specific interventions by top managers. We empirically document that managerial compensation is less performance-sensitive in firms whose investors hold greater stakes in industry competitors.

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

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