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Common Owners as Active Monitors: A Theory of Rational Neglect

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  • Rötzer, Sebastian

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.

Suggested Citation

  • Rötzer, Sebastian, 2022. "Common Owners as Active Monitors: A Theory of Rational Neglect," MPRA Paper 114560, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:114560
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    File URL: https://mpra.ub.uni-muenchen.de/114560/1/MPRA_paper_114560.pdf
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    References listed on IDEAS

    as
    1. Antoine Faure-Grimaud, 2004. "Public Trading and Private Incentives," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 985-1014.
    2. Alex Edmans & Doron Levit & Devin Reilly, 2019. "Governance Under Common Ownership," Review of Financial Studies, Society for Financial Studies, vol. 32(7), pages 2673-2719.
    3. Patrick Bolton & Ernst-Ludwig von Thadden, 1998. "Blocks, Liquidity, and Corporate Control," Journal of Finance, American Finance Association, vol. 53(1), pages 1-25, February.
    4. Cornes, Richard & Hartley, Roger, 2012. "Fully aggregative games," Economics Letters, Elsevier, vol. 116(3), pages 631-633.
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    More about this item

    Keywords

    Common ownership; corporate governance; industrial organization; product markets;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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