Common Ownership, Competition, and Top Management Incentives
56 Pages Posted: 5 Feb 2018 Last revised: 11 Jun 2018
Date Written: February 2018
When one firms 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 firms largest shareholders do not own large stakes in competitors.
Keywords: CEO pay, Common ownership, Competition, corporate governance, management incentives
JEL Classification: D21, G30, G32, J31, J41
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