The Effect of Common Ownership on Investment Decisions under Uncertainty

47 Pages Posted: 18 May 2020

See all articles by In Gyun Baek

In Gyun Baek

University of Wisconsin - Madison - Department of Accounting and Information Systems

Sewon Kwon

Sejong University - School of Business

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: April 21, 2020

Abstract

This paper examines the effects of firm-level common ownership on the level and efficiency of investment when firms face uncertainty. There is a current debate about the costs and benefits of common ownership, whereby a firm owns large stakes in multiple companies in the same industry. Critics of common ownership argue that it reduces competition and leads to a deadweight loss for the economy through decreased investment. Proponents of common ownership suggest that it allows firms to increase investment due to a reduced threat of involuntary knowledge spillover to rivals. This study contributes to this debate by examining the effects of uncertainty on these relationships. We find that common ownership allows firms to enjoy the value of waiting in the presence of uncertainty resulting in decreased investment that is more efficient. In contrast, common ownership increases investment when uncertainty is low, but these investments are less efficient. These results indicate that common ownership provides benefits to firms in the face of high uncertainty, but also allows firms to engage in value-destroying activities when uncertainty is low. These findings are important to regulators as they debate regulations that could limit common ownership.

Keywords: Investment; Common Ownership; Competition; Uncertainty; Real Options

JEL Classification: G23; G32; K22

Suggested Citation

Baek, In Gyun and Kwon, Sewon and Lynch, Dan, The Effect of Common Ownership on Investment Decisions under Uncertainty (April 21, 2020). Available at SSRN: https://ssrn.com/abstract=3581699 or http://dx.doi.org/10.2139/ssrn.3581699

In Gyun Baek

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

975 University Avenue
Madison, WI 53706
United States

Sewon Kwon

Sejong University - School of Business ( email )

Seoul
Korea, Republic of (South Korea)

Dan Lynch (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

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