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- Figures 0 500 1000 1500 2000 2500 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 MHHI Delta from Construc3on, Finance, Manufacturing and Services 15-â€17 Construc5on 20-â€39 Manufacturing 60-â€67 Finance 70-â€89 Services Figure I. Common Ownership Concentration (MHHID) in Various Sectors Over Time.
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- HHI MHHI Delta Main SIC group and Description # of 4-digit # of 4-digit Mean 10% 90% Mean 10% 90% SIC in 2013 SIC-Years 01-09 Agriculture, Forestry, Fishing 4 214 6882 5314 9955 448 4 1260 10-14 Mining 77 1684 4510 1174 8806 1609 24 3504 15-17 Construction 24 981 4761 1542 8168 1204 60 2719 20-39 Manufacturing 707 23761 5247 2230 8949 1253 53 2932 40-49 Transportation & Public Utilities 152 4184 3826 1028 7211 1797 133 3831 50-51 Wholesale Trade 107 3222 5034 2346 8660 1272 60 2839 52-59 Retail Trade 120 3903 4552 1669 7887 1452 141 3157 60-67 Finance, Insurance, Real Estate 168 5241 3817 1017 7908 1520 82 3618 70-89 Services 246 7409 4722 1681 8576 1113 62 2518 Table 2. Panel B: Time-series variation of Production Market (HHI) and Common Ownership (MHHI Delta) Concentration, by Industry.
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- Our paper is further related to a recent stream of literature that investigates the causes and consequences of “common ownership†of firms. In particular, Azar et al. (2015, 2016) argue that common ownership causes higher product prices in the airline and banking industries, respectively.
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- The most closely related paper is Aggarwal and Samwick (1999a) (henceforth AS), who examine theoretically and empirically how the (optimal) use of RPE is related to product market competition, as measured by the HHI index of market concentration. By contrast, we are interested in how RPE relates to common ownership concentration in the industry (measured by O’Brien and Salop (2000)’s MHHI delta (MHHID), whereas total market concentration is MHHI = HHI + MHHID), holding fixed the traditional HHI measure of concentration. The key differences from AS are as follows. First, theoretically, AS show that the relation between HHI and RPE depends on whether firms compete à la Bertrand or Cournot.14 By contrast, we show that the effect of common ownership on the use of RPE is unambiguously negative.
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- The present paper also relates to a literature and a continuing public debate on the causes of the increase in CEO pay over the past decades that is not entirely explained by observable changes (Bebchuk and Grinstein, 2005; Gabaix and Landier, 2008). In particular, we show that the rise of common ownership can explain part of the unexplained increase in top executive pay, both theoretically and empirically.
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- The present paper provides a first answer to the question of how anti-competitive shareholder incentives resulting from common ownership are translated into the anti-competitive behavior of firms. Our paper shows that managerial incentives are, at least to some extent, aligned with common shareholders’ anti-competitive incentives. It also supports the view that anti-competitive effects caused by common ownership can obtain without “collusion,†that is, without direct or indirect coordination between firms. This insight informs a vivid debate in the legal literature industry-size firms, evidence is consistent with the use of RPE in CEO compensation. 21 Among those, our theoretical analysis is closest in spirit to Aggarwal and Samwick (1999a) and DeMarzo and Kaniel (2016) who both study moral hazard models with linear RPE contracts. Whereas the former paper focuses on product market competition, the latter investigates the role of relative wealth concerns.
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- This figure plots the ownership concentration as measured by MHHID averaged across four-digit SIC code industries for various sectors (construction, manufacturing, finance, and services) for the years 1994 to 2013. 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 HHI vs MHHI Total in Manufacturing HHI MHHI Total Figure II. Four-digit SIC HHI versus MHHI over time in Manufacturing.
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- This figure plots the product market and ownership concentration in manufacturing industries as measured by HHI and MHHID averaged across four-digit SIC code industries in manufacturing for the years 1994 to 2013. Tables Table 1. Summary Statistics for Key Variables. We report the average and other summary statistics for the variables at the manager level (total compensation and tenure), at the firm level (performance, size, and volatility), and at the industry level (HHI and MHHI Delta).
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- This table reports the average proportion of firms in two-digit SIC industries for which a given investor is among the largest ten shareholders as of June 2013.
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- Variables N Mean Median Std 10% 90% At the manager level TDC1 (Compensation ’000) 223605 2308 1364 2413 411 5967 Tenure (years) 252443 4.6 3 3.7 1 10 At the firm level Own Performance 39426 521.8 119.8 1693.7-822 2607.2 Rival Performance (SIC4) 36797 504.3 108.7 1528.1-639.4 2301.2 Log(Sale) 41760 7.06 6.99 1.66 5.08 9.25 Volatility 38249 0.1218 0.1075 0.0639 0.0598 0.2014 At the industry level (SIC4) HHI 9340 4814 4674 2942 853 8963 MHHI Delta 9340 1437 1140 1285 94 3203 Table 2. Panel A: Cross-sectional Variation of Production Market (HHI) and Common Ownership (MHHI Delta) Concentration Across and Within industries. This table reports summary statistics for product market and ownership concentration for the average two-digit SIC industry, whereas averages are taken across four-digit SIC industries.
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