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 :

December 20 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 poses a sharp challenge to antitrust orthodoxy and corporate governance scholarship.

We identify and examine the causal mechanisms that might link common ownership to higher prices. To do so, we offer a typology that distinguishes potential mechanisms along three dimensions: whether CCOs induce anticompetitive actions by a firm that raise the CCO’s portfolio value at the expense of that firm’s 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 consider whether each mechanism is tested by the existing empirical evidence, and whether the mechanism is plausible—that is, effective, feasible, and in a CCO’s interest. 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 and most consistent with the empirical evidence is selective omission: to press for firm actions that increase both firm value and portfolio value, while remaining passive where the two conflict. 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 firm value-decreasing mechanisms, as to which the interests of CCOs and noncommon owners conflict, and to mechanisms that target specific firm actions, rather than the firm’s operations as a whole. Second, some mechanisms are ineffective in raising portfolio value or would pose major implementation problems for CCOs. Third, because most institutional CCOs have only weak incentives to increase portfolio value, they are likely not to benefit from pursuing mechanisms that carry significant reputational costs or legal liability. We spell out several implications of our analysis. First, a convincing case for broad reform has not been made. Second, any serious analysis of anticompetitive effects must pay careful attention to systematic differences in the incentives of different investor types. Third, CCOs often have procompetitive effects, particularly when they are invested in some but not all firms in an industry. 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