Modelling the Objective Function of Managers in the Presence of Overlapping Shareholding

46 Pages Posted: 3 Nov 2018 Last revised: 13 Oct 2021

See all articles by Duarte Brito

Duarte Brito

New University of Lisbon

Einer Elhauge

Harvard Law School

Ricardo M. Ribeiro

Universidade Católica Portuguesa, Católica Porto Business School

Helder Vasconcelos

Universidade do Porto - Faculdade de Economia (FEP)

Date Written: October 12, 2021

Abstract

The objective function of managers in the presence of overlapping shareholding may differ from the traditional own-firm profit maximization, as they may internalize the externalities their strategies impose on other firms. The dominant formulation of the objective function in such cases has, however, been critiqued for yielding counter-intuitive profit weights when the ownership of non-overlapping shareholders is highly dispersed. In this paper, we examine this issue. First, we make use of a probabilistic voting model (in which shareholders vote to elect the manager) to microfound an alternative formulation of the objective function of managers, which solves the above-mentioned criticism. Second, we apply the two formulations to the set of S&P500 firms. We show that ownership dispersion of non-overlapping shareholders is, in fact, a relevant empirical issue, which may induce an over-quantification of the profit weights computed from the dominant formulation, particularly under a proportional control assumption.

Keywords: Manager Objective Function, Overlapping Shareholding, Ownership Dispersion, Proportional Control, Banzhaf Control

JEL Classification: L13, L41

Suggested Citation

Brito, Duarte and Elhauge, Einer R. and Ribeiro, Ricardo and Vasconcelos, Helder, Modelling the Objective Function of Managers in the Presence of Overlapping Shareholding (October 12, 2021). Available at SSRN: https://ssrn.com/abstract=3264113 or http://dx.doi.org/10.2139/ssrn.3264113

Duarte Brito

New University of Lisbon ( email )

1099-085 Lisboa, 1099-085
Portugal

Einer R. Elhauge

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Ricardo Ribeiro (Contact Author)

Universidade Católica Portuguesa, Católica Porto Business School ( email )

Rua Diogo Botelho, 1327
Porto, 4169-005
Portugal
+351-22619-6200 (Phone)
+351-22619-6291 (Fax)

HOME PAGE: http://ricardomribeiro.github.io/

Helder Vasconcelos

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Dr. Roberto Frias
s/n
4200-464 Porto, 4200-464
Portugal

HOME PAGE: http://www.fep.up.pt/docentes/hvasconcelos

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