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

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

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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Abstract

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.

Original languageEnglish
Article number102905
JournalInternational Journal of Industrial Organization
Volume87
DOIs
Publication statusAccepted/In press - 18 Dec 2022

Keywords

  • Manager objective function
  • Overlapping shareholding
  • Ownership dispersion
  • Proportional control
  • Banzhaf control

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