A new body of research suggests that when institutional investors hold stakes in the same firms within an industry, they influence those companies to cooperate rather than compete.
As this so-called common ownership has become the norm in recent years (82 percent of S&P 500 firms are now cross-held, up from 17 percent in 1990), the subject has come into vogue among academic researchers, with three studies on the topic published since 2016 and no fewer than 14 more working papers.
Of those, all of the published papers and 11 of the 14 working papers conclude that common ownership causes anti-competitive behavior. Legal scholars have expressed concern also, with three influential law professors proclaiming in the Antitrust Law Journal that “the concentration of markets through large institutional investors is the major new antitrust challenge of our time.” Regulators have expressed keen interest.
Amid this flurry of concern, new research from Tuck professor Katharina Lewellen suggests the alarm may be unfounded. In a working paper entitled “Does common ownership really increase firm coordination?” Lewellen and co-author Michelle Lowry of Drexel University answer in the negative. They find that the effects attributed to common ownership are caused by other factors, notably the different ways in which firms have responded to the financial crisis. After correcting for these factors, they find little robust evidence that common ownership affects firm behavior, in spite of the many new studies offering evidence to the contrary.
“Once you look at the data closely, the evidence is much less compelling,” Lewellen says of the studies she reviewed, which examine the anti-competitive effect of cross ownership in a variety of different settings and using different methodologies.
Lewellen didn’t come to that conclusion lightly. Her initial interest was to reconcile the seeming contradiction between the studies she was reading and her own knowledge of management practices at big firms.
“First of all, the theory is very good. Clearly, if you own shares in two different companies you have incentives to increase value in both of them,” says Lewellen, who teaches corporate finance at Tuck. “And yet people in the industry and researchers outside of the literature expressed a lot of skepticism. They said it doesn’t sound plausible given what we know about how these large institutions operate.”
Her interest piqued, Lewellen set out to solve the puzzle. “We were completely agnostic about what we would find,” she says.
The academic papers on this topic use a variety of methods to gauge changes in the prevalence of cross-ownership. Lewellen and Lowry focused their analysis on the most commonly used quasi-experiments that cause sudden increases in common ownership: a broad sample of mergers between financial institutions; the 2009 merger of asset-management behemoths BlackRock and Barclay’s Global Investors (BGI); additions to the S&P 500; and the annual reconstitution of the Russell 1000 and 2000 indices.
Under close scrutiny, they found flaws in each of those methods. The effect of mergers, for example, is difficult to separate from the economic environment in which they occur—and nearly half of all firms affected by the mergers from 1980 to 2015 come from 2008 and 2009, during the tumult of the financial crisis.
“When you select your treatment and control samples, you are selecting very specific firms,” Lewellen says, “and for the treatment you are much more likely to select high-growth industries.” In layman’s terms, the studies compare apples and oranges.
Using a merger sample including the crisis years, Lewellen and Lowry replicated the results of other studies, such as improved performance of cross-owned firms (suggesting cooperation) and reduced investment in R&D (consistent with reduced incentives to compete). Those results went away when they excluded the crisis mergers, or when they used control firms from the same industries as the treated firms.
The paper is already gaining attention. The Norwegian Government Pension Fund Global—a $1 trillion investment vehicle with significant cross-holdings—invited Lewellen to present the paper in Norway, and the Federal Trade Commission has come calling as well. Regulators have been paying close attention to the issue of cross ownership. They’ve listened to the alarm bells, and now they are hearing Lewellen’s voice of calm. Time will tell which message is more persuasive.