Jie (Jack) He is Associate Professor at the University of Georgia Terry College of Business and Jiekun Huang is an Assistant Professor of Finance at the College of Business at the University of Illinois Urbana-Champaign. This post is based on a recent article by Professor He and Professor Huang, forthcoming in the Review of Financial Studies.
Over the past few decades, publicly traded firms have become increasingly interconnected through common stock ownership. For example, the fraction of U.S. public firms held by institutional blockholders that simultaneously hold at least 5% of the common equity of other same-industry firms has increased from below 10% in 1980 to about 60% in 2014. This increasing trend of institutional cross-ownership of same-industry firms suggests that treating firms as independent decision-makers in the product market may no longer adequately capture real strategic interactions among them. In fact, ample anecdotal evidence suggests that large common blockholders can exert influence on the corporate decisions and product market strategies taken by their cross-held firms. Given the tremendous growth in same-industry institutional cross-ownership and the fact that such ownership is still largely unregulated (as opposed to the heavy regulations on direct same-industry ownership such as horizontal mergers), understanding the economic consequences of same-industry institutional cross-ownership, especially its implications for product market dynamics, is important for both academics and policy makers.
