Common Ownership and Executive Incentives: The Implausibility of Compensation As an Anticompetitive Mechanism

40 Pages Posted: 1 Mar 2019

Date Written: March 1, 2019

Abstract

Mutual funds, pension funds and other institutional investors are a growing presence in U.S. equity markets, and these investors frequently hold large stakes in shares of competing companies. Because these common owners might prefer to maximize the values of their portfolios of companies, rather than the value of individual companies in isolation, this new reality has lead to a concern that companies in concentrated industries with high degrees of common ownership might compete less vigorously with each other than they otherwise would. But what mechanism would link common ownership with reduced competition? Some commentators argue that one of the most plausible mechanisms is executive pay design. The idea is that executive pay at companies in concentrated industries with high common ownership may be designed to dampen the incentives of the companies’ managers to compete aggressively with peer firms.

This essay challenges both the theoretical and empirical bases for this argument and contends that executive pay design is actually an implausible mechanism linking common ownership with reduced competition. For example, I show that, contrary to the claims of some commentators, the use of competition-enhancing executive relative performance evaluation as a compensation tool has increased dramatically in parallel with the increase in common ownership, exactly the opposite of what one would expect if common owners sought to dampen competition through pay design.

Despite voicing skepticism regarding a possible association between common ownership and executive pay design, this essay also offers suggestions for improving empirical analyses going forward that should help to resolve the debate. If, however, as this essay argues, executive pay design is an implausible mechanism, this determination tends to undermine the broader claim that common ownership dampens inter-firm competition.

Keywords: common ownership, executive compensation, relative performance evaluation, competition

JEL Classification: J33, K21, K22, L13, L41, M12, M52

Suggested Citation

Walker, David I., Common Ownership and Executive Incentives: The Implausibility of Compensation As an Anticompetitive Mechanism (March 1, 2019). Boston Univ. School of Law, Law and Economics Research Paper No. 19-3 . Available at SSRN: https://ssrn.com/abstract=3345120 or http://dx.doi.org/10.2139/ssrn.3345120

David I. Walker (Contact Author)

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
136
Abstract Views
753
rank
222,372
PlumX Metrics