Common Ownership and Hedge Fund Activism: An Unholy Alliance?

This paper proposes a novel mechanism linking common ownership to anticompetitive outcomes. Common owners promote shareholder-friendly governance policies in their portfolio firms, empowering interventions by activist hedge funds that discourage managers from investing. The cumulative impact of hedge fund activism contributes to anticompetitive outcomes, without collusion between managers. Effectively, and possibly unintentionally, common owners exert monopsonistic power over labor by reducing aggregate investment. Subsequently, the artificially depressed wages result in transfer of wealth to shareholders. While hedge fund activism generally improves social welfare in a competitive equilibrium, it may reduce social welfare under common ownership. The symbiotic relationship between common owners and activist hedge funds can be detrimental to society. The paper establishes a new connection between the rise of institutional ownership, adoption of shareholder-friendly policies, increased hedge fund activism, reduced investment and labor share, and heightened capital market returns.