Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Matthew R. Backus, Columbia University
Common Ownership in America: 1980--2017
AbstractWhen competing firms possess overlapping sets of investors, maximizing shareholder value may provide incentives that distort competitive behavior, affecting pricing, entry, contracting, and virtually all strategic interactions among firms. We propose a structurally consistent and scaleable approach to the measurement of this phenomenon for the universe of S&P 500 firms between 1980 and 2017. Over this period, the incentives implied by the common ownership hypothesis have grown dramatically. Contrary to popular intuition, this is not primarily associated with the rise of BlackRock and Van- guard: instead, the trend in the time series is driven by a broader rise in diversified investment strategies, of which these firms are only the most recent incarnation. In the cross-section, there is substantial variation that can be traced, both in the theory and the data, to observable firm characteristics – particularly the share of the firm held by retail investors. Finally, we show how common ownership can theoretically give rise to incentives for expropriation of undiversified shareholders via tunneling, even in the Berle and Means (1932) world of the “widely held firm.”
Financial Markets, Common Ownership and Product Market Outcomes
AbstractWe link the shift of active to passive investing and the rise of common ownership incentives (profit loads on rival firms by the manager of a firm) in product markets to the fact that passive investors are more diversified. We empirically confirm the above relationship for US industries in the years 2004-2012, and show that these increased money flows to passive investors are positively related to firms’ markups through the profit loads.
Common Ownership, Institutional Investors, and Welfare
AbstractThis study evaluates the effects of institutional investors' common ownership of firms competing in the same market. Overall, common ownership has two opposing effects: (a) it serves as a device for weakening market competition, and (b) it induces diversification, thereby reducing portfolio risk. We conduct a detailed welfare analysis within which the competition-softening effects of an increased degree of common ownership is weighted against the associated diversification benefits.
Institutional Horizontal Shareholdings and Generic Entry in the Pharmaceutical Industry
AbstractBrand-name pharmaceutical companies often file lawsuits against generic drug manufacturers that challenge the monopoly status of patent-protected drugs. Institutional horizontal shareholdings, measured by the generic shareholders' ownership in the brand-name company relative to their ownership in the generic manufacturer, are significantly positively associated with the likelihood that the two parties enter into a settlement agreement in which the brand pays the generic manufacturer to stay out of the market. Horizontal shareholdings are also positively associated with the brand's daily abnormal stock returns around the settlement agreement. Generic manufacturers who settle with the brand-name company are more likely to delay the sale of generic substitutes if they have higher horizontal shareholdings with the brand-name firm. These delays preclude other generic firms from entering the market.
- L1 - Market Structure, Firm Strategy, and Market Performance
- G3 - Corporate Finance and Governance