A (lifelong) dream come true: my co-authors & I wrote a paper with an Oxford comma!

"Common Ownership, Competition, and Top Management Incentives" proposes & tests a mechanism through which common ownership affects firm behavior & product market outcomes.
https://florianederer.github.io/common_ownership.pdf

Many of you will know that common ownership isn't a totally new thing (Rotemberg 1984!), but there has been a ton of exciting recent work on common ownership.

One of the key questions though has been how the interests of (common) owners translate into product market outcomes.

Our theoretical framework combines ingredients from 3 different fields:
- managerial incentive design problem (managers)
- strategic product market competition (pricing specialists)
- common ownership (investors)

In line with empirical evidence more common ownership leads to:
- lower managerial incentives & productivity at the firm level,
- higher prices, lower quantities, and lower concentration at the product market level, and
- price cross-market variation even within the same firm.

Not only does this explain
- why industries with higher common ownership are less competitive, and
- why firms with higher common ownership compete less aggressively, but also
- why the same firm competes differently across product markets even within the same industry.

These results do not rely on implausible assumptions about what investors and managers know or do.

There is:
- NO collusion, coordination or communication between investors
- NO market-specific intervention by top managers
- NO knowledge of investors' preferred strategies

Contrary to widespread misconceptions in both the corporate governance and antitrust law literatures (you all know who I am subtweeting here!) there is also no conflict between the objectives of active corporate governance and competitive product market behavior.

The model also reveals one hitherto missing link: the empirical relationship between common ownership & managerial incentives.

We document that common ownership reduces managerial incentives and this effect is as large as the effect of firm volatility on managerial incentives.

By using variation from *competitor* index inclusions we verify that this negative effect is not due to endogenous ownership allocations.

The effect on managerial incentives at index incumbent competitors is gradual: not present before and increasing in magnitude afterwards.

For lovers of @arindube-style appendices there are about a million tables in the back of the paper showing that across all dimensions (WPS, CO measures, industry definitions, non-CEOs) of the full matrix of robustness checks the negative effect of CO is pretty much the same.

I can't emphasize enough how much I learned about common ownership from so many people since starting this project, including some on #EconTwitter: @joseazar @conlon_chris @MSinkinson @elhauge @FTCPhillips @DirkJenter @aedmans @ProfFionasm @NathanShekita @melissa_newham

We also learnt a lot from interactions with @matt_levine ... and hopefully we even convinced @CliffordAsness that this is an interesting issue to study.