Working Paper: CEPR ID: DP12674
Authors: Martin Schmalz; Florian Ederer; Mireia Gine; Miguel Antón
Abstract: 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; corporate governance
JEL Codes: D21; G30; G32; J31; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flatter managerial incentives (M52) | competitive dynamics within industries (L13) |
| sensitivity of managerial wealth to firm performance (L25) | managerial effort and competition (L13) |
| common ownership concentration (L22) | performance-sensitive compensation (J33) |
| common ownership (G32) | flatter managerial incentives (M52) |
| common ownership (G32) | sensitivity of managerial wealth to firm performance (L25) |
| common ownership (G32) | industry profits and competition (L11) |