Common Owners as Active Monitors: A Theory of Rational Neglect

54 Pages Posted: 18 Sep 2022 Last revised: 10 Oct 2022

See all articles by Sebastian Rötzer

Sebastian Rötzer

University of Lausanne - Institute of Banking and Finance (IBF); Swiss Finance Institute, Students

Date Written: October 3, 2022

Abstract

I propose a novel mechanism of how common ownership affects product market competition. Internalization of shareholders' portfolio interests into managers' objective functions is no longer necessary if owners can provide active monitoring that affects firms' ability to compete. Whenever product market externalities cause common owners to neglect monitoring, firms are less competitive compared to a counterfactual where shareholder interests are aligned with firm value maximization. I formally prove this intuition in a static model of active monitoring with common ownership that allows for heterogeneous firms and portfolio allocations. Based on the game's unique Nash equilibrium, I derive empirical predictions that link unobserved active monitoring to observed product market outcomes. I conclude with a brief analysis of two policy interventions aimed at curbing the anti-competitive effects of common ownership.

Keywords: Common ownership, corporate governance, industrial organization, product markets

JEL Classification: G34, L13

Suggested Citation

Rötzer, Sebastian, Common Owners as Active Monitors: A Theory of Rational Neglect (October 3, 2022). Available at SSRN: https://ssrn.com/abstract=4190295 or http://dx.doi.org/10.2139/ssrn.4190295

Sebastian Rötzer (Contact Author)

University of Lausanne - Institute of Banking and Finance (IBF) ( email )

CH-1015 Lausanne
Switzerland

Swiss Finance Institute, Students ( email )

c/o University of Geneva
42, Bd du Pont d'Arve
Geneva, CH-1211
Switzerland

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