The Case for Doing Nothing About Institutional Investors’ Common Ownership of Small Stakes in Competing Firms

Abstract

Recent empirical research purports to demonstrate that institutional investors’ “common ownership” of small stakes in competing firms causes those firms to compete less aggressively, injuring consumers. A number of prominent antitrust scholars have cited this research as grounds for limiting the degree to which institutional investors may hold stakes in multiple firms that compete in any concentrated market. This Article contends that the purported competitive problem is overblown and that the proposed solutions would reduce overall social welfare.

With respect to the purported problem, we show that the theory of anticompetitive harm from institutional investors’ common ownership is implausible and that the empirical studies supporting the theory are methodologically unsound. The theory fails to account for the fact that intra-industry diversified institutional investors are also inter-industry diversified and rests upon unrealistic assumptions about managerial decision-making. The empirical studies purporting to demonstrate anticompetitive harm from common ownership are deficient because they inaccurately assess institutional investors’ economic interests and employ an endogenous measure that precludes causal inferences.

Even if institutional investors’ common ownership of competing firms did soften market competition somewhat, the proposed policy solutions would themselves create welfare losses that would overwhelm any social benefits they secured. The proposed policy solutions would create tremendous new decision costs for business planners and adjudicators and would raise error costs by eliminating welfare-enhancing investment options and/or exacerbating corporate agency costs.

In light of these problems with the purported problem and shortcomings of the proposed solutions, the optimal regulatory approach — at least, on the current empirical record — is to do nothing about institutional investors’ common ownership of small stakes in competing firms.

Keywords: HHI, MHHI, modified herfindahl, horizontal shareholding, common ownership, Elhauge, Eric Posner, Jose Azar, Section 7, cross-ownership, antitrust, airlines

JEL Classification: G23, G28, K21, K22, L10, L13, L16, L40, L41, L51