The Perils of Institutional Investors’ Diversification: Defying the Myth
52 Pages Posted: 27 Jan 2019 Last revised: 2 Apr 2019
Date Written: January 15, 2019
Institutional investors’ diversification strategy has become the “hot button” issue of corporate law, and the hallmark of their business strategy is under attack. Current scholarly work argues that when institutional investors cross-own firms, an anti-competitive outcome ensues. Importantly, the argument is that this is the case even if the diversified institutional investors have no control over the firms in which they invest, the investment is completely passive, and the (passive) investors do not coordinate in any way. This view has not only gained scholarly support, but has persuaded enforcement agencies. The agencies have reportedly begun to investigate instances of the phenomenon, and have even struck down mergers based on this theory of competitive harm. Since cross-holdings play a critical role in institutional investors’ ability to diversify their portfolio, the implications of these new analyses are far reaching. This Paper challenges the recent analyses. It argues that common ownership of firms by institutional investors is competitively benign. The theoretical argument is supported by very recent empirical findings.
Keywords: Institutional Investors, Cross Ownership, Common Ownership, Horizontal Shareholding, Antitrust, Competition
JEL Classification: L10, L13, L22, L40, L41
Suggested Citation: Suggested Citation