Common Ownership, Competition, and Top Management Incentives
Ross School of Business Paper No. 1328
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 511/2017
59 Pages Posted: 3 Jul 2016 Last revised: 19 Sep 2018
There are 3 versions of this paper
Common Ownership, Competition, and Top Management Incentives
Common Ownership, Competition, and Top Management Incentives
Common Ownership, Competition, and Top Management Incentives
Date Written: June 1, 2018
Abstract
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
Florian Ederer
Yale School of Management ( email )
165 Whitney Avenue
New Haven, CT 06511
United States
HOME PAGE: http://faculty.som.yale.edu/florianederer/
