Common Ownership, Competition, and Top Management Incentives

Common Ownership, Competition, and Top Management Incentives

Miguel Anton, Florian Ederer, Mireia Giné, Martin Schmalz

Series number :

Serial Number: 
511/2017

Date posted :

July 03 2017

Last revised :

February 06 2018
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Keywords

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

When one firm's strategy affects other firms' value, optimal executive incentives depend on whether shareholders have interests in only one or in multiple firms. Performance-sensitive contracts induce managerial effort to reduce costs, and lower costs induce higher output. Hence, greater managerial effort can lead to lower product prices and industry profits.

Therefore, steep managerial incentives can be optimal for a single firm and at the same time violate the interests of common owners of several firms in the same industry. Empirically, managerial wealth is more sensitive to performance when a firm's largest shareholders do not own large stakes in competitors.

Authors

Real name:
Miguel Anton
Real name:
Florian Ederer