Does Common Ownership Raise Antitrust Concerns?

“The agencies evaluate new learning from the academic community and are prepared to take action on common ownership when appropriate. Where sufficient evidence exists that the effect of particular acquisitions may substantially lessen competition, the agencies will consider appropriate responses, including possible enforcement actions.”

— Federal Trade Commission on Common Ownership

Introduction

In recent decades, the finance sector has witnessed a significant surge in assets managed by large institutional investors. Pension funds, mutual funds, and family trusts now commonly hold substantial equity stakes in multiple publicly traded companies, including those that compete directly with one another. This phenomenon, known as common ownership, has sparked a heated debate among economists, legal scholars, and policymakers. The central concern is whether common ownership dampens competitive incentives among rival firms, potentially leading to anti-competitive behaviors that harm consumers.

The Debate Over Common Ownership

Critics argue that common ownership creates incentives for firms to engage in anti-competitive practices such as price-fixing, limiting supply, or erecting barriers to entry for new competitors. They suggest that when investors hold significant shares in competing companies, they may prefer these firms to avoid fierce competition that could erode profits. Several studies have provided evidence supporting the anti-competitive effects of common ownership, prompting calls for a reassessment of antitrust enforcement and the introduction of new regulations targeting this practice (e.g., Azar, Schmalz, and Tecu (2018); Azar and Schmalz (2017); Azar, Raina, and Schmalz (2022); He and Huang (2017)).

On the other side of the debate, many researchers find little or no evidence that common ownership leads to anti-competitive outcomes (e.g., Koch, Panayides, and Thomas (2021); Lewellen and Lowry (2021); Dallas (2018); Ginsburg (2018); Dennis, Gerardi and Schenone (2022)). They argue that the concerns are overstated and that imposing regulations could have unintended negative consequences, particularly for the investment industry. Restricting common ownership might undermine diversification and risk-sharing strategies that are crucial for investors and institutions. Moreover, Bebchuk and Hirst (2019); Bebchuk, Cohen, and Hirst (2017); Bebchuk and Hirst (2018) further highlight that the existing agency problems within institutional investors discourage them from actively engaging in anti-competitive coordination among portfolio firms.

Despite extensive discussions, a significant gap remains in the literature: the lack of direct evidence linking common ownership to anti-competitive behavior. Most existing studies have approached the issue indirectly, examining variables such as pricing strategies, profit margins, investment patterns, and merger activities. While these studies offer valuable insights, they often fail to conclusively attribute observed market outcomes to anti-competitive actions resulting from common ownership.

This ambiguity has left policymakers in a challenging position. Without clear evidence of harm, it’s difficult to justify the introduction of new regulations that could disrupt investment practices and potentially impact the financial well-being of millions of individuals who rely on institutional investors for retirement savings and other investment services.

Investigating the Link Through Antitrust Litigation

To address this gap, our research employs a more direct method of investigation: analyzing antitrust litigation cases. The logic is straightforward—if common ownership leads to anti-competitive behavior, this should reflect itself in legal actions taken by regulators and consumers against firms engaging in such anti-competitive practices.

We compile datasets of antitrust cases initiated by the Federal Trade Commission (FTC), the Department of Justice (DOJ), and consumers. By matching these cases to publicly traded companies, we seek to test whether firms with higher levels of common ownership are more likely to be involved as defendants in antitrust litigation. These cases represent clear instances where firms are alleged to have engaged in behaviors that harm competition and consumer welfare and are based on detailed economic analysis of individual cases.

Key Findings

Our analysis yield two key findings:

1. No Significant Link between Common Ownership and Antitrust Litigation: Our analysis reveals no significant or robust relationship between levels of common ownership among pairs of firms and their likelihood of being involved in government-initiated or consumer-initiated antitrust litigation. This null result remains consistent across OLS regressions and Difference –in-Differences tests, including shocks such as major financial institution mergers and S&P 500 index inclusions. Drawing on current literature, Anton et al. (2022) suggests that common ownership can reduce shareholder incentives for diligent monitoring of senior managers, potentially leading to greater managerial slack. This reduction in oversight might actually decrease anticompetitive behavior, as collusion typically requires significant managerial effort.  Indeed, our findings indicate a negative correlation between the likelihood of a firm’s involvement in antitrust litigation and the level of common ownership, which appears to support the managerial slack hypothesis.
2. Reduced Incentives to Collude: Although our findings do not support a link between common ownership and antitrust litigation, it remains possible that common ownership facilitates collusion or otherwise reduces competitive behavior. However, the rarity of such observed litigation cases may hinder the empirical detection of such anti-competitive effects. In this context, common ownership might instead be correlated with other mechanisms that enable collusion, such as its influence on corporate governance mechanisms like managerial incentives, as noted by Antón et al. (2022).

We explore two potential mechanisms that could facilitate collusion: appointing interlocking directors to enhance inter-company communication and benchmarking executive compensation against rival firms by using them as compensation peers. While these practices could theoretically promote collusion, our analysis shows that empirically common ownership is negatively associated with both phenomena. This suggests that the absence of litigation in our study may not solely reflect the rarity of antitrust cases, but it also indicates that common ownership’s impact on collusion could be neutral or even negative, challenging the assumption that it fosters anti-competitive practices.

Discussion and conclusion

Multiple large ownership stakes in competing firms benefit professional investors such as pension funds and mutual funds by allowing them to diversify their portfolios. Restricting such common ownership without strong justification could lead to unintended negative consequences.

Our findings highlight important policy considerations. They challenge the idea that common ownership inherently raises antitrust concerns, suggesting that current fears may be overstated. Policymakers should avoid introducing regulations that disrupt investment strategies without clear evidence of harm.