Ownership and Competition

Abstract

We develop a framework to explore how financial markets shape the ownership structure of industry rivals. A fraction of identical investors acquires diversified portfolios with positions in all firms (common owners), while the remaining investors hold undiversified portfolios. When investors influence competition, the return of diversified portfolios and the risk of undiversified portfolios may increase with the industry's degree of common ownership (CO). This crowding out of undiversified investors exacerbates the anti-competitive effects of CO and generates non-fundamental volatility. Our results are robust to alternative mechanisms to influence competition and different trading motives, and offer novel empirical implications.

Keywords: common ownership, competition, corporate governance

JEL Classification: D82, D83, G34