The literature on competitive effects of common ownership has grown at a fast rate in the past two years. This review seeks to give some structure to the latest work in this area by selectively covering a few of the more prominent papers that have emerged over the past couple of years. It concludes that progress in terms of data quality and scope would be the most welcome step regulators could take in order to improve transparency and quality of research on the competitive effects of common ownership.
The paper, available here, proceeds by looking at different dimensions of the common ownership debate:
Section I looks at the theory of governance mechanisms by which common ownership can cause variation in competitive outcomes.
A common feature of the policy discussion on common ownership are demands for more “causal evidence” of how corporate governance mechanisms can cause anticompetitive effects, over and above the evidence the literature has already accumulated. To an economist, this demand can seem puzzling, since, in economics, incentives cause behaviour. As such, the causal interpretation of an empirical relationship always comes from theory, not from “direct evidence.” However, a tighter connection between empirical findings and theoretical underpinnings would be desirable in the literature on common ownership, since there remains tension between theoretical findings and empirical results which occasionally go unacknowledged.
In any event, four main corporate governance mechanisms that can implement the anticompetitive incentives from common ownership have been identified: (i) do nothing (or do less than what an undiversified, dedicated investor of similar size would) (ii) use voting (e.g. on directors) (iii) use direct engagement; and (iv) use compensation. The literature in the past two years has provided theory and evidence in support of common ownership leading to anticompetitive effects through all four mechanisms. Models have been developed to explain why common ownership can lead owners to choose to underinvest in company stewardship. It has been explained how voting can yield incentives for managers to take account of common shareholders’ interests, in particular through influence exerted via the market for corporate directors and director elections. A number of researchers have identified instances of common owners engaging with portfolio firms, with the apparent objective or effect of changing product market structure or product market outcomes. Other research has found that common ownership robustly correlates with less performance-sensitive top management pay.
Some of these studies emphasise the important message that common ownership with anticompetitive effect is by no means solely driven by “passive” diversification by index funds across industry rivals. Instead, it is in many cases the results of active portfolio choice, perhaps with the deliberate aim to reduce competition. The empirical literature shows that the rise in common shareholding is driven not only by the growth of the Big Three index fund families, but rather by the increased diversification of all institutional investors, including active funds.
Section II considers research on common ownership effects in a variety of markets and industries, as well as common ownership effects on other aspects of firm behaviour.
In addition to the ‘original’ studies on airlines, banking and drug markets, we have recently seen a series of studies on the effects of common ownership on prices and output in a variety of industries. These studies suggest that common ownership effects on competition may exist also in numerous industries. Studies on agricultural seeds, on hundreds of consumer goods, hospital prices and beverage markets have been particularly influential.
While most studies focus on the unilateral effects of common ownership, a newly emergent stream of work evaluates the effect of common ownership on facets of corporate behaviour beyond consumer prices. These include studies into the impact of common ownership on generic entry, bidding for public procurement, and increased merger activity in general – i.e. they consider whether common ownership can lead to coordinated behaviour across firms.
Section III looks at estimation techniques, common ownership measures, and identification criteria.
The author compares the typical approaches of industrial organisation economics and finance economics, and concludes that they are complementary in assessing the effects of common ownership. Satisfying the criteria of both fields jointly (such as building realistic structural models of product market competition under common ownership that also feature governance frictions, endogenous ownership structure, and perhaps even endogenous asset prices) will be difficult or impossible. In order to make true progress, both the industrial organisation and finance fields need to become more tolerant and open-minded, and appreciate the virtues of the methods and approaches used in the other field, rather than focusing exclusively on the flaws and limitations of the other field’s methods. The progress that has been made is built on borrowing from a variety of fields.
Building on this, the author conducts a review of cross-fertilisation in research methods and ideas in these fields. This is extremely technical and beyond the scope of this email (and, honestly, my understanding).
Section IV then discusses some issues with industry-wide studies.
Existing literature has emphasised that the anticompetitive effects of common ownership are only measurable in larger and more concentrated subsets of markets. The author is unaware of any theory which predicts that, if effects are present and measurable in some specific markets, they should also be equally present in all other markets, or in all industries, or on average across markets, firms, and industries. Empirically, the literature has also emphasised cross-sectional differences in the competitive effects of common ownership.
Despite this, some papers have argued that, if anticompetitive effects due to common ownership were present within individual industries, then the same anticompetitive outcomes should be observed when the data is expanded to cover all industries or over an extended period. Others have searched, and failed to find, robust evidence for anticompetitive effects across industries on average. However, this not only ignores the existing literature, but also confuses industries for the markets where anticompetitive effects occur. To test whether common ownership has effects in industries beyond those that have been examined, market-level studies have to be run in these industries, industry by industry. There is no shortcut by way of running cross-industry studies.
Section V argues that data quality is a crucial ingredient to high-quality research.
In light of the explosion of evidence that current levels of common ownership affect firms’ strategic behaviour and product market outcomes, it appears increasingly untenable for competition authorities worldwide to have limited, if any, knowledge of who are the owners of the firms they regulate. After all, the regulation of concentrated asset ownership is their domain.
The assumption that underlies most research and policy on antitrust enforcement, namely that firms with different names are separately owned or generally behave as if they were, has little support. Instead, it has been strongly rejected by dozens of studies. As such, the call for better and more comprehensive ownership data is louder than ever. Given the importance of data quality in co-determining the quality of research in past years, the right move for competition authorities would be to collect comprehensive ownership information for both publicly traded and significant private firms, and make it available in an easily usable format to researchers worldwide.
As was the case with the paper above, this piece provides a thorough overview of the avalanche of papers that have come out on common ownership in recent years. The author is – again – one of the main proponents for intervention against anticompetitive common ownership. The common ownership debate has, for a while, been best described as acrimonious. This show through at times.
One topic that the author does not touch on is the relationship between experts working on this topic and the wider competition community. My impression is that there is presently a disconnect between economists working in this field, which seem to be progressively accepting the growing evidence that common ownership can lead to detrimental outcomes, and antitrust experts who are still divided about whether anything should be done about this – and, if so, what. This is arguably a question more for the community of readers of this email than for economists doing empirical and theoretical research on common research, but it would have been nice to see the issue discussed at more length in this paper. This is also something which could be more conducive to action by the competition community than merely requesting that agencies collect data for the benefit of academic researchers.