Working Paper: NBER ID: w25454
Authors: Matthew Backus; Christopher Conlon; Michael Sinkinson
Abstract: When competing firms possess overlapping sets of investors, maximizing shareholder value may provide incentives that distort competitive behavior, affecting pricing, entry, contracting, and virtually all strategic interactions among firms. We propose a structurally consistent and scaleable approach to the measurement of this phenomenon for the universe of S&P 500 firms between 1980 and 2017. Over this period, the incentives implied by the common ownership hypothesis have grown dramatically. Contrary to popular intuition, this is not primarily associated with the rise of BlackRock and Van- guard: instead, the trend in the time series is driven by a broader rise in diversified investment strategies, of which these firms are only the most recent incarnation. In the cross-section, there is substantial variation that can be traced, both in the theory and the data, to observable firm characteristics – particularly the share of the firm held by retail investors. Finally, we show how common ownership can theoretically give rise to incentives for expropriation of undiversified shareholders via tunneling, even in the Berle and Means (1932) world of the “widely held firm.”
Keywords: common ownership; market power; pricing; investment strategies
JEL Codes: G34; L0; L13; L21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Common ownership (G32) | Distorted competitive behavior (L13) |
| Increase in common ownership profit weights (G32) | Distorted competitive behavior (L13) |
| Common ownership (G32) | Weighted average of own profits and competitors' profits (D33) |
| Higher profit weights (D33) | Tunneling (L91) |
| Investor concentration and diversified investment strategies (G11) | Increase in common ownership profit weights (G32) |