Katharina Lewellen is Associate Professor of Business Administration at Dartmouth College Tuck School of Business, and Michelle Lowry is TD Bank Endowed Professor at Drexel University LeBow College of Business. This post is based on their recent paper, forthcoming in the Journal of Financial Economics. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here); and Horizontal Shareholding by Einer Elhauge (discussed on the Forum here).
In recent years, academics and regulators have raised concerns about the high levels of common ownership within U.S. firms. The argument is that common owners—that is, investors holding stakes in multiple firms within a single industry—have incentives to discourage competition among industry rivals in their portfolios. Common ownership has increased steadily over the past few decades, fueled by the rise in institutional ownership and the emergence of large and highly diversified institutional investors. Whereas only 17% of S&P 500 firms had a blockholder that also owned a block in a competitor firm in 1990, this fraction increased to 81% by the end of 2015.
A growing number of academic studies conclude that the rise in common ownership has indeed caused cooperation among firms to increase and competition to decrease. This evidence led to several prominent policy proposals to regulate or limit common ownership. However, empirical testing of the effects of common ownership is challenging as ownership and firm behavior could correlate for many reasons even in the absence of a causal link. In this paper, we evaluate the empirical approaches used in prior literature to identify the effects of common ownership. With a more thorough understanding of the advantages and shortcomings of each approach, we then revisit the conclusions of prior empirical studies that common ownership affects firm behavior.
