The Strategies of Anticompetitive Common Ownership

The Strategies of Anticompetitive Common Ownership

C. Scott Hemphill, Marcel Kahan

Series number :

Serial Number: 
423/2018

Date posted :

October 22 2018

Last revised :

October 21 2018
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Keywords

  • airlines • 
  • Antitrust • 
  • common shareholding • 
  • Common ownership • 
  • collusion • 
  • executive compensation • 
  • horizontal • 
  • HHI • 
  • institutional investors • 
  • MHHI • 
  • modified Herfindahl-Hirschman Index • 
  • shareholdings • 
  • Blackrock • 
  • Vanguard • 
  • State Street

Recent scholarship considers anticompetitive effects of common concentrated ownership. Empirical evidence reporting that common concentrated owners (“CCOs”) are associated with higher prices and lower output seems to confirm such effects, posing a sharp challenge to both antitrust orthodoxy and corporate governance scholarship.

We identify and examine the causal mechanisms that could link common ownership to higher prices. To do so, we offer a typology that distinguishes potential mechanisms along three dimensions: whether CCOs induce anticompetitive firm actions that raise the CCO’s portfolio value at the expense of firm value; whether a mechanism operates at the firm level or is instead targeted to specific firm actions; and whether the CCO induces anticompetitive effects through affirmative activities, such as communicating with management or voting, or instead by remaining passive. We make three major points. First, several mechanisms emphasized in the literature are not, in fact, empirically tested. Of particular interest, the leading empirical studies are limited to value-decreasing mechanisms that target specific firm actions. They are not designed to identify the use of value increasing mechanisms or mechanisms that operate at the firm level. Second, some mechanisms are ineffective in raising portfolio value or would pose major implementation problems for CCOs. Third, institutional investors are likely to avoid mechanisms that carry significant reputational costs or legal liability, particularly because their incentives to increase portfolio value are much weaker than generally appreciated. Our main conclusion is that, for most proposed mechanisms, there is no strong theoretical basis for believing that institutional CCOs would want to employ them, no significant evidence suggesting that they do employ them, or both. The mechanism that is most plausibly employed by institutional CCOs is selective omission: to press for firm actions that increase both firm value and portfolio value, while remaining passive where the two conflict. We also spell out several implications of our analysis. First, index funds—the paradigmatic common owners—are ill-equipped to employ selective omission or other mechanisms targeting specific firm actions. Second, CCOs have ambiguous welfare effects. Even if their conduct raises prices in some markets, it also induces efficiency improvements and lower prices in other markets. Third, the case for broad reform has not been made. Such reforms are ineffective in dealing with passive mechanisms and counterproductive, imposing new costs without generating significant procompetitive effects for consumers. We advocate a more searching examination of the steps actually taken by CCOs and firms—the who, where, when and how predicted by the most plausible mechanisms.
 

Authors

Real name:
C. Scott Hemphill