Ownership Structure, Incentives, and Asset Prices

Abstract

We show how firms' ownership structures, managerial contracts, and asset prices interact in a dynamic equilibrium model. Our framework distinguishes a firm's small shareholders from its large shareholders, who play the role of mediators by determining managerial contracts, while also influencing asset prices through their dynamic trades. Agency conflicts between large shareholders and managers lead to more volatile and higher expected stock returns. Risk sharing through managerial incentive contracts, however, makes block ownership dynamics effectively insulated from fluctuations in firm-specific parameters. We derive a number of testable implications for the endogenous relations among ownership concentration, managerial incentives, and stock returns.