Menesh S. Patel (University of California, Davis – School of Law) and Merritt B. Fox (Columbia University – Law School; European Corporate Governance Institute) have posted Common Ownership: Evidence, Mechanisms, and Policy Restraint (Research Handbook on Antitrust and Finance, Marco Corradi & Samuel Weinstein eds., forthcoming) on SSRN. Here is the abstract:
The common ownership hypothesis—the claim that overlapping institutional shareholdings across rival firms dampen competition even absent any coordination or communication among common owners—has generated one of the most vigorous debates in modern antitrust. This chapter evaluates the hypothesis along two independent dimensions and concludes that, at current levels of common ownership, it is not plausible.
First, the chapter reviews the empirical literature. While initial empirical studies suggested a causal connection between common ownership and competitive harm, a substantial body of subsequent research has failed to find any causal link. The weight of the well-constructed empirical evidence does not support the hypothesis.
Second, and more fundamentally, the chapter examines whether any plausible mechanism could link common ownership to competitive harm in the absence of coordination or communication. A firm’s competitive decisions are made by its managers, not directly by its shareholders, and managers operate within a corporate governance structure that continues to discipline them toward own-firm profit maximization even where common ownership is present. The chapter evaluates the leading mechanisms proposed in the literature to reconcile common ownership with competitive harm and finds each unconvincing given how corporate governance actually operates.
These conclusions counsel policy restraint. Proposals to significantly curtail institutional investors’ diversified holdings or to mount widescale antitrust investigation of common ownership would not remedy any demonstrated competitive harm, while imposing real costs on the diversification benefits enjoyed by millions of investors. At the same time, the chapter’s conclusions do not support blanket immunity. In specific circumstances, common ownership has the potential to generate competitive harm. In those circumstances, the chapter’s corporate governance framework offers courts and enforcers a workable method for assessing whether common ownership is, in fact, distorting firms’ incentives to compete.
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