Who’s Paying Attention? Measuring Common Ownership and Its Impact on Managerial Incentives
There is a growing sense among academics and practitioners that common ownership—where two firms are at least partially owned by the same investor—is on the rise among publicly-held U.S. firms and that this could have important implications for corporate governance and anti-competitiveness, among numerous other economic outcomes. Despite the recent attention that common ownership has received, many questions remain open. For example, while there is a sense that the rise of common ownership is driven, in part, by the merger of asset managers and the increasing popularity of index investing, there is little discussion of whether we should expect such mergers and indexing to increase managers’ motives to internalize how their actions might affect the value of other firms. If asset managers with larger, more diversified holdings or index investors are less informed or attentive to firm-specific actions, managers would have little incentive to internalize the impact of their actions on the holdings of such investors.
Our paper fills this void by deriving a general measure of common ownership and its impact on managerial incentives. A key feature of our measure is that it accounts for the possibility that not all investors are attentive. This differs from other proposed measures of common ownership, which implicitly assume that all investors are fully informed about the externalities the firms impose on each other. The measure we derive is flexible and makes very little assumptions regarding the nature, sign, or magnitude of the underlying externalities that managers’ actions may have, thus allowing one to study a broad range of potential effects common ownership may have. The measure can be best interpreted as a relative measure of how intensely managers factor common ownership into their action choices per unit of the externality. The measure also allows researchers to ascribe different importance weights to investors and to easily make different assumptions about what factors affect the likelihood each common investor is attentive.
Taking this measure to the data, we are also able to illustrate the importance of investors’ attention. Managers have less incentive to consider the portfolio holdings of inattentive investors when making policy choices, and a measure that accounts for this can lead to very different conclusions about the rise of common ownership. For example, assuming all investors are fully informed can lead to estimates regarding the increase in managers’ incentives to internalize externalities over the last 30+ years that are orders of magnitude more than when one allows for the possibility that not all investors are attentive. Moreover, one can show empirically that index investing and asset manager mergers, both of which tend to create overlapping ownership structures among stock-pairs, have no clear association with changes in managerial incentives because both have the potential to reduce the attentiveness of a firm’s investors.
Overall, our findings provide important context for recent empirical and theoretical work that has suggested common ownership is important for competitiveness, corporate governance, firm outcomes, etc.