DP12674 Common Ownership, Competition, and Top Management Incentives

Author(s): Miguel Antón, Florian Ederer, Mireia Gine, Martin Schmalz
Publication Date: February 2018
Date Revised: June 2018
Keyword(s): CEO pay, Common ownership, Competition, corporate governance, management incentives
JEL(s): D21, G30, G32, J31, J41
Programme Areas: Labour Economics, Financial Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12674

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.