Einer Elhauge is the Petrie Professor of Law at Harvard Law School. This post is based on Professor Elhauge’s recent paper.
When the leading shareholders of horizontal competitors overlap, horizontal shareholding exists. In my initial Harvard Law Review article on horizontal shareholding (discussed on the Forum here), I showed that economic theory and two intra-industry studies indicated that high levels of horizontal shareholding in concentrated product markets can have anticompetitive effects, even when each individual horizontal shareholder has a minority stake. I argued that those anticompetitive effects could help explain longstanding economics puzzles, including executive compensation methods that inefficiently reward executives for industry performance, the historic increase in the gap between corporate profits and investment, and the recent rise in economic inequality. I also showed that when horizontal shareholding has likely anticompetitive effects, it can be remedied under Clayton Act §7.
In a new paper, I show that new proofs and new empirical evidence strongly confirm my economic claims. One new economic proof establishes that, if corporate managers maximize either their expected vote share or re-election odds, they will maximize a weighted average of their shareholders’ profits from all their stockholdings and thus will lessen competition the more that those shareholdings are horizontal, even if each horizontal shareholder has a minority stake. Another new economic proof shows that with horizontal shareholding, corporations maximize their shareholders’ interests by increasing the extent to which executive compensation is based on industry performance, rather than individual firm performance. Neither new proof requires any communication or coordination between different shareholders, between different managers, or between shareholders and managers.
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