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Common Ownership, Competition, and Innovation

Paper Session

Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PDT)

Manchester Grand Hyatt, Seaport A
Hosted By: American Finance Association
  • Chair: Jose Azar, University of Navarra

When Does Common Ownership Matter?

Shradha Bindal
,
University of Kansas

Abstract

I find that the effects of common ownership vary depending on firms’ product market characteristics. While an increase in common ownership does not have a consistent effect on gross margin, it raises a firm’s gross margin by an average of two percentage points for firms with similar products. Moreover, with an increase in common ownership, firms with similar products have higher profitability and reduce their R&D expenditures. I use mergers and acquisitions of financial institutions as a quasi-natural experiment to exogenously vary a firm’s common ownership levels and establish causality. My findings suggest that any
regulation to curb the anticompetitive effects of common ownership needs more industry-level analysis and should take into account the product-market characteristics of firms.

Institutional Horizontal Shareholdings and Generic Entry in the Pharmaceutical Industry

Joseph J. Gerakos
,
Dartmouth College
Jin Xie
,
Chinese University of Hong Kong

Abstract

Brand-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.

Common Ownership, Creative Destruction, and Inequality: Evidence from U.S. Consumers

Hadiye Aslan
,
Georgia State University

Abstract

Utilizing a unique micro-level dataset from the consumer goods industry, we study pricing and non-pricing effects of common ownership at the product level. We find positive elasticity of consumer goods prices to common ownership and that firms pass along price increases to consumers through the marginal cost channel. Our results are robust to using Bartik-like shifters for market shares and common ownership, and variations in common ownership driven by financial mergers. We present the first large-scale systematic evidence on the relationship between common ownership and creative destruction at the product level. Our results show that common owners introduce new products at a faster rate and discontinue existing product items at a similar pace compared to control firms, resulting in greater net variety. Finally, we provide new insights in that the rate of increase in consumer goods prices is higher in product modules catering to lower-income households, whereas consumers in high-income segments benefit more from the increase in product variety due to higher common ownership. These results deliver important parameters for assessing welfare implications to the extent of how different types of consumers benefit from or are hurt by institutional ownership concentration.

Common Ownership and Market Entry: Evidence from the Pharmaceutical Industry

Melissa Newham
,
KU Leuven and DIW Berlin
Jo Seldeslachts
,
KU Leuven and DIW Berlin
Albert Banal-Estanol
,
Pompeu Fabra University

Abstract

Common ownership - where two firms are partially owned by the same investor - and its impact on product markets has recently drawn attention. This paper focuses on implications for entry. We consider the entry decisions of generic pharmaceutical firms into drug markets opened up by the end of regulatory protection in the US. We provide a framework that shows that greater common ownership between the brand firm and a potential generic entrant re- duces the likelihood that this generic enters. We then extend this prediction to show that higher overall common ownership between the brand and all potential generic entrants at the market level leads to fewer generic entrants. We find robust evidence for these predictions: a one-standard-deviation increase in common ownership decreases the probability of individual entry by 9-13%, whereas a one-standard-deviation increase in market-level common ownership decreases the total number of entrants by 11-13% in that market.
Discussant(s)
Gordon Phillips
,
Dartmouth College
Sara Ellison
,
Massachusetts Institute of Technology
Matthew Weinberg
,
Ohio State University
Fiona Scott Morton
,
Yale University
JEL Classifications
  • G3 - Corporate Finance and Governance