Matthew Backus is Assistant Professor at Columbia Business School; Christopher Conlon is Assistant Professor at the New York University Stern School of Business; and Michael Sinkinson is Assistant Professor at the Yale School of Management. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); and New Evidence, Proofs, and Legal Theories on Horizontal Shareholding by Einer Elhauge (discussed on the Forum here).
The classic profit-maximizing model of the publicly-traded firm has underpinned every aspect of economics for a century, from antitrust and regulation to theories of taxes and trade. According to this model, a public firm’s shareholders hire the management to maximize the firm’s profits, and thereby maximize the value of those shares. Trends emerging in the past few decades, including the rise of indexing among investors have led some to question whether the classic model is still applicable. Unsurprisingly, this has led to a forceful debate, centered on the implications of common ownership, and the reliability of the research purporting to show its effects. Our new working paper, Common Ownership in America: 1980–2017 provides a new analytical framework for this debate, by comprehensively analyzing the theoretical and empirical implications of the common ownership hypothesis among all S&P 500 firms from 1980–2017. Our paper identifies why common ownership presents such a tremendous challenge to markets and regulators if prevailing hypotheses are true, but we also identify important data problems, misconceptions and erroneous assumptions that call into question the reliability of existing research. Our goal in doing so is to pave the way for more rigorous research and discussion on this important question.