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Common Ownership, Competition, and Top Management Incentives

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Abstract

Standard corporate finance theories assume the absence of strategic product market interactions or that shareholders don’t diversify across industry rivals; the optimal incentive contract features pay-for-performance relative to industry peers. Empirical evidence, by contrast, indicates managers are rewarded for rivals’ performance as well as for their own. We propose common ownership of natural competitors by the same investors as an explanation. We show theoretically and empirically that executives are paid less for own performance and more for rivals’ performance when the industry is more commonly owned. The growth of common ownership also helps explain the increase in CEO pay over the past decades.

Suggested Citation

  • Miguel Antón & Florian Ederer & Mireia Giné & Martin Schmalz, 2016. "Common Ownership, Competition, and Top Management Incentives," Cowles Foundation Discussion Papers 2046, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:2046
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    Cited by:

    1. Azar, José & Vives, Xavier, 2018. "Oligopoly, Macroeconomic Performance, and Competition Policy," CEPR Discussion Papers 13000, C.E.P.R. Discussion Papers.
    2. Brito, Duarte & Ribeiro, Ricardo & Vasconcelos, Helder, 2018. "Quantifying the coordinated effects of partial horizontal acquisitions," European Economic Review, Elsevier, vol. 110(C), pages 108-149.
    3. Melissa Newham & Jo Seldeslachts & Albert Banal-Estanol, 2018. "Common ownership and market entry: Evidence from the pharmaceutical industry," Working Papers of Department of Management, Strategy and Innovation, Leuven 623896, KU Leuven, Faculty of Economics and Business (FEB), Department of Management, Strategy and Innovation, Leuven.
    4. Werner Neus & Manfred Stadler & Maximiliane Unsorg, 2020. "Market structure, common ownership, and coordinated manager compensation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(7), pages 1262-1268, October.
    5. Jaspersen, Stefan, 2020. "Mutual Fund Bets on Market Power," CFR Working Papers 16-07, University of Cologne, Centre for Financial Research (CFR).
    6. Gary Bolton & Axel Ockenfels & Peter Werner, 2016. "Leveraging social relationships and transparency in the insider game," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 2(2), pages 127-143, November.
    7. Neus, Werner & Stadler, Manfred, 2018. "Common holdings and strategic manager compensation: The case of an asymmetric triopoly," University of Tübingen Working Papers in Business and Economics 109, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    8. Jacob P. Gramlich & Serafin J. Grundl, 2017. "Estimating the Competitive Effects of Common Ownership," Finance and Economics Discussion Series 2017-029, Board of Governors of the Federal Reserve System (U.S.).
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    12. Park, Jihwon & Sani, Jalal & Shroff, Nemit & White, Hal, 2019. "Disclosure incentives when competing firms have common ownership," Journal of Accounting and Economics, Elsevier, vol. 67(2), pages 387-415.
    13. Gilje, Erik P. & Gormley, Todd A. & Levit, Doron, 2020. "Who's paying attention? Measuring common ownership and its impact on managerial incentives," Journal of Financial Economics, Elsevier, vol. 137(1), pages 152-178.
    14. Neus, Werner & Stadler, Manfred & Unsorg, Maximiliane, 2020. "Market structure, common ownership and coordinated manager compensation," University of Tübingen Working Papers in Business and Economics 133, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    15. Oz Shy & Rune Stenbacka, 2020. "Common ownership, institutional investors, and welfare," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(3), pages 706-723, July.
    16. Brooks, Chris & Chen, Zhong & Zeng, Yeqin, 2018. "Institutional cross-ownership and corporate strategy: The case of mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 187-216.
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    More about this item

    Keywords

    Common ownership; competition; CEO pay; management incentives; governance;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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