Common Ownership, Competition, and Top Management Incentives
86 Pages Posted: 14 Oct 2020
Date Written: June 1, 2018
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.
Keywords: common ownership, competition, CEO pay, management incentives, governance
JEL Classification: G300, G320, D210, J310, J410
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