Common Ownership

This Policy Spotlight examines the data used for asset managers’ airline holdings in research on ‘common ownership’ and the relevance of index inclusion rules.

Letter to the Federal Trade Commission in connection with Hearing #8 on Competition and Consumer Protection in the 21st Century.

Remarks by Barbara Novick at the Federal Trade Commission Hearing #8 on Competition and Consumer Protection in the 21st Century panel on Institutional Investors, Diversification, and Corporate Governance.

Remarks by Barbara Novick at the OECD Discussion on Common Ownership by Institutional Investors.

In this WSJ Op-Ed, Barbara Novick discusses the balance between index and active investing.

Index investing has profoundly changed the way investors seek returns, manage risk, and build portfolios. Although the benefits of index investing for the investor are widely recognized, recent commentary has focused on its role in capital markets. In this ViewPoint, we outline some of the key elements of the debate, focusing on index investing in relation to company stocks and the equity markets. We also examine the development of theories around common ownership, building on our March 2017 ViewPoint entitled “Index Investing and Common Ownership Theories."

German language edition of Index Investing Supports Vibrant Capital Markets.

Index funds have made broadly diversified portfolios accessible to even the smallest investor however, certain research literature has sought to link index investing to higher prices for consumer products and services, and has called for dramatic policy changes that could eliminate their tremendous value to investors. In this ViewPoint, we outline the benefits of index investing, the limitations of some of the research literature, and conclude by describing why some of the policy recommendations proposed would harm the average investor.

German language edition of Index Investing and Common Ownership Theories.

In this WSJ Op-Ed, Barbara Novick examines the role of index funds and proposed policy measures that would adversely impact index fund investors.

This article examines common ownership through a European lens, and whether the theory is sufficiently robust to provide a basis for enforcement, and (if so) whether current European Union competition law tools could be used to that end. It concludes that it is premature to draw any conclusions as to the reality of alleged common ownership concerns. Until a better understanding of the underlying facts and a broad academic consensus emerge, reform prescriptions that have been advanced are a solution in search of a problem.

This article analyzes aspects of the common ownership theory in the light of contemporary corporate governance developments and debate, and concludes that drawing regulatory and policy conclusions from current mixed empirical evidence relating to common ownership is premature.

This article considers the legality of “mere” common ownership – horizontal shareholding that is not accompanied by any sort of illicit agreement (e.g., a hub-and-spoke conspiracy) or the holding of control-conferring shares – under the U.S. antitrust laws, particularly with regard to Clayton Act Section 7 and Sherman Act Section 1. It finds that condemning mere common ownership under the antitrust laws would likely entail significant marginal costs, while the marginal benefits such condemnation would secure are speculative.

This article considers the decision and error costs that would result from the interventions that have been proposed for remedying the purported problem of common ownership. It concludes that they would be substantial and would likely outweigh any benefits the interventions would secure.

The authors examine the impact of common ownership on corporate innovation using exogenous shocks from mergers of financial institutions. They find different effects of common ownership for different investor types.

The authors assess various common ownership causal mechanisms, finding them either implausible or lacking empirical evidence. This paper also covers the problems with using 13F data and MHHI delta to form conclusions about common ownership. Additionally, the authors discuss the importance of considering the differences between asset owners and asset managers.

The authors examine U.S. Census Bureau data, which are often used to cite increasing industry concentration, and find that the data is far too aggregated to measure market concentration and reliable data are available for only a few sectors. Further, an increase in market concentration doesn’t mean there has been a failure in antitrust law or its enforcement, as concentration naturally occurs when the most innovative and efficient firms grow.

The Committee on Capital Markets Regulation analyzes the consequences of policy proposals to limit institutional investors to holding stock in only one firm per concentrate industry and concludes that such proposals would impede the efficient funding of companies and significantly increase the cost of diversification for investors.

The authors highlight key challenges of relying on MHHI delta to measure common ownership. This article notes, with numerical analysis, that MHHI measures along one dimension – concentration – whereas common ownership is multidimensional in nature.

The authors explore the importance of accounting for investor inattention and express skepticism that the growth of common ownership has had a significant impact on managerial incentives, taking this into account.

The authors examine the relationship between common ownership and competition and find that common ownership is not related with industry profitability or pricing, nor is it related with measures of non-price competition. Antitrust measures that seek to restrict common ownership are thus not warranted.

The authors examine various approaches used to identify the supposed anticompetitive effects of common ownership and find the effects often attributed to common ownership have other causes, such as varied firm responses to the financial crisis. Re-evaluating the link between common ownership and firm outcomes, the authors do not find robust evidence linking common ownership and firm behavior.

Analyzing the net competitive effect of common ownership on U.S. public companies, the authors find that firms with higher common ownership experience greater competitive risks from rival firms and that this relationship is causal.

The authors challenge the assumptions employed by recent empirical studies on common ownership and assert that the proposed policy measures would do more harm than good, as such policies would create welfare losses outweighing any potential social benefits.

The author notes that the underlying common onwership theories are unsupported. The proposed common ownership policy measures would reduce the rights of investors and challenge good corporate governance and stewardship, stifling the minority shareholder voice.

Looking at mergers between financial institutions outside of 2008-2009, the authors found no evidence to support the theory that common ownership affects firm behaviors. Further, they conclude that prior findings on this issue can be attributed to other factors.

This paper contends that the observance of common ownership in a given market is not sufficient reason to conclude there is competitive harm in in that market. There is insufficient justification for policy responses including ownership thresholds, and restrictions on common ownership would run contrary to modern antitrust law.

The Committee finds that the empirical research underpinning common ownership theories is flawed has not demonstrated an antitrust problem; therefore, policy measures are not warranted. The policy measures that have been proposed by certain academics would harm savers and have severe consequences for the investing public if implemented.

Looking at mergers between financial institutions outside of 2008-2009, the authors found no evidence to support the theory that common ownership affects firm behaviors. Further, they conclude that prior findings on this issue can be attributed to other factors.

In this paper, the authors argue that common ownership proponents misunderstand the incentives of institutional investors, overstate the strength of the current empirical research on common ownership, and inappropriately stretch the application of various legal statutes in their commentary.

"In the paper, the authors challenge the methodology employed by Azar et al in analyzing the U.S. airline industry. The authors conduct their own empirical analysis, and they find no evidence of a relationship between common ownership and ticket prices in the airline industry."

Using the same data as recent empirical research, the authors find no evidence that common ownership raises airline ticket prices.

The authors examine the recent empirical research purporting to show that common ownership by institutional investors lead to anticompetitive effects, and find that the effects of minority shareholdings on competition are not well-established. Further, calls for changes to antitrust policy are premature based on the current evidence.

The authors find that the original research suggesting competitive harm from common ownership is far from definitive and cast doubt as to whether such claims would warrant any blanket policy measure. The policy measures proposed would inflinct increased burdens on investors, raise costs, and impede households' abilities to save for their long-term financial goals.

The authors examine the claims made by common ownership proponents. They find that the proposed policy recommendations to limit the ownership of multiple firms within certain industries are overly stringent and would have a chilling effect on the valuable role of institutional investors in corporate governance.

Employing an approach that analyzes the weights that firms place on each others' profits, the authors find the effects on the impact of common ownership on competition in the banking industry to be mixed and overall muted compared with previous studies and urge further study.

The paper finds that large diversified institutional investors with common ownership, through their corporate governance efforts, positively influence executive compensation structures that reward performance relative to industry peers.

This paper focuses on index fund stewardship, nothing that there are many incentives of index fund managers which the common ownership theorists do not take into account. In addition, the proposed common ownership policy responses could push investment stewardship in a direction that is overly deferential to managers.

The authors posit that due to competition with active funds - who can remove a company from their portfolio at any time - passive funds are incentivized to exercise their governance rights in an informed way. Hence, passive investors are associated with improving governance at underperforming firms and mediating activism.

Investment stewardship practices are important to index managers since they cannot "vote with their feet' by selling individual stocks, given that index portfolios are designed to track an index. Index managers have a fiduciary duty to ensure good governance of the companies in which they invest on behalf of investors.

The authors demonstrate that passive investors have a positive impact on firm governance that is associated with improvements in firms' long-term performance. Passive mutual funds have resulted in more independent directors, removal of takeover defenses, and more equal voting rights.