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Estimating the Competitive Effects of Common Ownership

39 Pages Posted: 26 Mar 2017  

Jacob Gramlich

Federal Reserve Board

Serafin Grundl

Board of Governors of the Federal Reserve System

Date Written: April 21, 2017

Abstract

If managers maximize the payoffs of their shareholders rather than firm profits, then it may be anticompetitive for a shareholder to own competing firms. This is because a manager’s objective function may place weight on profits of competitors who are held by the same shareholder. Recent research found evidence that common ownership by diversified institutional investors is anticompetitive by showing that prices in the airline and banking industries are related to generalized versions of the Herfindahl-Hirschman Index (HHI) that account for common ownership. In this paper we propose an alternative approach to estimating the competitive effects of common ownership that relates prices and quantities directly to the weights that such managers may be placing on the profits of their rivals. We argue that this approach has several advantages. First, the approach does not inherit the endogeneity problems of HHI regressions, which arise because HHI measures are functions of quantities. Second, because we treat quantities as outcomes we can look for competitive effects of common ownership on both prices and quantities. Third, while concentration measures vary only at the market-time level, the profit weights also vary at the firm level, which allows us to control for a richer set of unobservables. We apply this approach to data from the banking industry. Our empirical findings are mixed, though they’re preliminary as we investigate irregularities in ownership data (Anderson and Brockman (2016)). The sign of the estimated effect is sensitive to the specification. Economically, estimated effects on prices and quantities are fairly small.

Keywords: Banking Competition, Common Ownership, GHHI, MHHI

JEL Classification: G21, G34, L10, L20, L40

Suggested Citation

Gramlich, Jacob and Grundl, Serafin, Estimating the Competitive Effects of Common Ownership (April 21, 2017). FEDS Working Paper No. 2017-029. Available at SSRN: https://ssrn.com/abstract=2940137 or http://dx.doi.org/10.17016/FEDS.2017.029r1

Jacob Gramlich (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Serafin Grundl

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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