The Role of Transaction Costs in Common Ownership

“Common Ownership” arises when shareholders hold substantial stakes in different firms that impose externalities on each other, and it challenges the assumption that firms act to maximize their own profits. While firm decisions are ordinarily made by its board of directors and managers, most shareholders retain control over the appointment and dismissal of directors. Furthermore, corporate law requires managers to consider the interests of its shareholders when making decisions on behalf of the firm. Accordingly, if the interests of a firm’s shareholders include the profits of other firms, one might expect the firm to not only maximize its own profits, … Read more