Management Accounting Section Midyear Meeting

Common Ownership, Executive Compensation, and Product Market Competition

• In Event: Product Markets and Customers (Mixed Methods)

Abstract

The negative effects of common ownership on competition have received significant attention, but many proposed mechanisms for institutional investor influence seem implausible. We develop and test an analytical model of optimal compensation in an oligopoly with common ownership, focusing on a plausible channel involving institutional investors influencing executive compensation. Our model implies that commonly owned firms will place lower weight on revenue relative to profit, especially among firms with higher market shares. Using both associative analyses and an event study difference-in-differences design based on plausibly exogenous institutional mergers, we find that cross-ownership has zero (or a marginally positive) effect on the use of revenue-based pay. Results involving relative performance incentives are similar. Collectively, our results provide no support for the notion that cross-owning block-holders intervene in the contracting process in order to soften executives' incentives to behave aggressively.

Authors

• Matthew Bloomfield, University of Pennsylvania

• Henry L Friedman, University of California-Los Angeles

• Hwa Young Kim, UCLA