The Conundrum of Common Ownership

Abstract

The common ownership debate has become one of the most contentious issues in corporate law today. This debate is a by-product of major changes to capital market ownership structure, which have triggered concerns about the rise of institutional investors, the growth of index investing, and the rapid concentration of ownership in major international financial markets.

Common ownership theory focuses on concerns about the incentives of large financial institutions holding widely diversified portfolios of shares in competing companies within a particular economic sector. Proponents of the common ownership theory argue that, even where institutional investors have relatively small ownership stakes, their collective holdings in competing companies produce anticompetitive effects. Other scholars, however, have challenged both common ownership theory and its regulatory prescriptions. Although common ownership theory began in the United States, it is now being discussed around the world.

This article examines three conflicting narratives that emerge in this literature concerning institutional investors and common ownership theory. The article seeks to position these narratives within the context of the rising influence of institutional investors since the early 1990s and its relation to major international corporate governance developments. It analyzes aspects of common ownership theory in light of these contemporary corporate governance developments, and argues that drawing regulatory and policy conclusions from the current body of conflicting empirical findings on the effects of common ownership is premature.

Keywords: shareholding, concentrated ownership, portfolio diversification, common ownership, institutional investors, index funds, passive investors, antitrust, regulation

JEL Classification: D21, D43, G30, G32, G34, K21, K22, L13, L21, L22