Modeling Horizontal Shareholding With Ownership Dispersion
21 Pages Posted: 3 Nov 2018 Last revised: 17 Nov 2018
Date Written: October 26, 2018
The dominant formulation for modeling the objective function of managers of competing firms with horizontal shareholding has been critiqued for producing the result that, if non-horizontal shareholders are highly dispersed and the interests of horizontal shareholders in the different firms coincide, managers would mimic the interests of horizontal shareholders even if they own a share of the firm that does not induce full control. We show that this issue can be avoided with an alternative formulation that is derived from a probabilistic voting model that assumes shareholders with higher financial stakes will take greater interest in the managerial actions, which yields the result that managers maximize a control-weighted sum of the shareholders' relative returns.
Keywords: Horizontal Shareholding, Ownership Dispersion, Manager Objective Function, Proportional Control, Banzhaf Control
JEL Classification: L13, L41
Suggested Citation: Suggested Citation