Common Ownership, Executive Compensation, and Product Market Competition

58 Pages Posted: 11 Oct 2021 Last revised: 4 Aug 2023

See all articles by Matthew J. Bloomfield

Matthew J. Bloomfield

The Wharton School of the University of Pennsylvania

Henry L. Friedman

University of California, Los Angeles (UCLA) - Anderson School of Management

Hwa Young Kim

Hong Kong University of Science and Technology

Date Written: August 3, 2023

Abstract

The negative effects of common ownership on competition have received significant attention, but many proposed mechanisms for institutional investor influence seem implausible. We develop and test an analytical model of optimal compensation in an oligopoly with common ownership, focusing on revenue-based pay as a plausible channel through which institutional investors might influence competition. Our model implies a negative effect of common ownership on firms' use of revenue-based pay. Using both associative analyses and an event study difference-in-differences design based on plausibly exogenous institutional mergers, we find no evidence of a negative relation between common ownership and the use of revenue-based pay, except in an economically small subsample of extremely concentrated owners. Results involving relative performance incentives are similar. Collectively, our results provide no support for the notion that cross-owning block-holders in general influence compensation contracts in order to soften executives' incentives to compete aggressively.

Keywords: Common ownership, competition, executive compensation, strategic delegation

JEL Classification: D43, G30, L13, M12, M40, M52

Suggested Citation

Bloomfield, Matthew J. and Friedman, Henry L. and Kim, Hwa Young, Common Ownership, Executive Compensation, and Product Market Competition (August 3, 2023). Available at SSRN: https://ssrn.com/abstract=3936918 or http://dx.doi.org/10.2139/ssrn.3936918

Matthew J. Bloomfield

The Wharton School of the University of Pennsylvania ( email )

1325 Steinberg-Dietrich Hall
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Philadelphia, PA PA 19103-1724
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6073513042 (Fax)

Henry L. Friedman (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Hwa Young Kim

Hong Kong University of Science and Technology ( email )

Hong Kong University of Science and Technology
Clear Water Bay, Kowloon
Hong Kong

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