CFDP 2046
Common Ownership, Competition, and Top Management Incentives
Author(s):Publication Date: July 2016
Pages: 67
Abstract:
Standard corporate finance theories assume the absence of strategic product market interactions or that shareholders don’t diversify across industry rivals; the optimal incentive contract features pay-for-performance relative to industry peers. Empirical evidence, by contrast, indicates managers are rewarded for rivals’ performance as well as for their own. We propose common ownership of natural competitors by the same investors as an explanation. We show theoretically and empirically that executives are paid less for own performance and more for rivals’ performance when the industry is more commonly owned. The growth of common ownership also helps explain the increase in CEO pay over the past decades.
Keywords: Common ownership, competition, CEO pay, management incentives, governance
JEL Classification Codes: D21, G30, G32, J31, J41
See CFDP Version(s): CFDP 2046R