Carrots and Sticks: Equilibrium Incentives in Firms with Different Equity Holding Structures

Abstract

This paper examines how the structure of corporate holding impacts managerial incentive alignment mechanisms, and strategic objectives. Using data from 500 large Indian firms, we compare firms with dispersed equity ownership and business-group affiliates within the same institutional framework. We find that performance sensitivity of CEO pay and turnover are different in group affiliates and stand-alone firms. The strategic choices of firms differ in response to managerial incentives. However, firm performance is similar for both types of firms, irrespective of the differences in incentive structures and strategic choices. Overall, this paper suggests that corporate holding structures and managerial incentives adjust to optimize strategic choices and firm performance.

Keywords: Corporate Governance, Controlling Shareholders, Firm Performance, Strategic Choices, India

JEL Classification: G30, G32, G34