Common Ownership, Competition, and Top Management Incentives

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SSRN Electronic Journal

Publication Year:
2018
Usage 15993
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SSRN
SSRN Id:
2802332
DOI:
10.2139/ssrn.2802332
Author(s):
Anton, Miguel ; Ederer, Florian ; Gine, Mireia ; Schmalz, Martin C.
Publisher(s):
Elsevier BV
Tags:
Common ownership; competition; CEO pay; management incentives; governance
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article description
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.