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

Brito, Duarte; Elhauge, Einer; Ribeiro, Ricardo; Vasconcelos, Helder

http://hdl.handle.net/10362/151536

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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.

Descrição

We would like to thank the Editor, José L. Moraga, and three anonymous referees for their thorough and thoughtful reports. We would also like to thank Ricardo Gonçalves, Fiona Kasperk, Torsten Persson, Michele Polo, Giacomo Ponzetto, Vasco Rodrigues, Martin Schmalz, Guido Tabellini, Kyle Wilson and Alminas Žaldokas, as well as seminar and conference participants at EARIE, IIOC, PEJ and Universidade Católica Portuguesa for helpful comments and suggestions. We want to especially thank Amir Amel-Zadeh, Fiona Kasperk, and Martin Schmalz for sharing the data with us. Einer Elhauge gratefully acknowledges financial support from Harvard Law School. All remaining errors are of course our own. Publisher Copyright: © 2022

Palavras-chave

Banzhaf control Manager objective function Overlapping shareholding Ownership dispersion Proportional control Industrial relations Aerospace Engineering Economics and Econometrics Economics, Econometrics and Finance (miscellaneous) Strategy and Management Industrial and Manufacturing Engineering