Modelling the objective function of managers in the presence of overlapping shareholding

• Type: Article in International Scientific Journal
• Date: 2023

Authors

Brito, D (Author) Other; Elhauge, E (Author) Other; Ribeiro, R (Author) Other; Helder Vasconcelos (Author) FEP

Journal

Title: International Journal of Industrial Organization

Vol. 87

ISSN: 0167-7187

Publisher: Elsevier

Indexing

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Other information

Authenticus ID: P-00X-RHY

DOI: 10.1016/j.ijindorg.2022.102905

Abstract (EN): The objective function of managers in the presence of overlapping shareholding may differ from the traditional own-firm profit maximization, as they may internalize the externalities their strategies impose on other firms. The dominant formulation of the objective function in such cases has, however, been criticised for yielding counter-intuitive profit weights when the ownership of non-overlapping shareholders is highly dispersed. In this paper, we examine this issue. First, we make use of a probabilistic voting model (in which shareholders vote to elect the manager) to microfound an alternative formulation of the objective function of managers, which solves the above-mentioned criticism. Second, we apply the two formulations to the set of S&P 500 firms. We show that ownership dispersion of non-overlapping shareholders is, in fact, a relevant empirical issue, which may induce an over-quantification of the profit weights computed from the dominant formulation, particularly under a proportional control assumption.(c) 2022 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license ( http://creativecommons.org/licenses/by-nc-nd/4.0/ )

Language: English

Type (Professor's evaluation): Scientific

No. of pages: 25