Common Ownership: Do Managers Really Compete Less?

103 Pages Posted: 8 Dec 2021 Last revised: 13 Jan 2022

See all articles by Merritt B. Fox

Merritt B. Fox

Columbia University - Law School

Menesh S. Patel

University of California, Davis - School of Law

Date Written: November 19, 2021

Abstract

This Article addresses an important question in modern antitrust: when large investment funds have holdings across an industry, is competition depressed?

The question of the impact of common ownership on competition has gained much attention as the role of institutional shareholding has grown, with the funds of the three largest management companies holding in aggregate approximately 21% of the shares of a typical S&P 500 firm. It is a source of acute disagreement among scholars and policymakers, with some who believe common ownership does depress competition seeking antitrust law reforms that would significantly constrain how investment funds operate. Neglected in this vigorous debate, however, is a careful analysis of how the persons who in the first instance actually make the decisions that determine an industry’s competitiveness—firm managers— would act differently in the presence of common ownership. In essence, even if the common owners were to pressure firms to compete less, how, if at all, would that change the structure of incentives within which these managers work?

The forces that shape managerial decision-making at publicly traded firms have been the object of intense study by scholars of corporate governance for decades, primarily through use of managerial agency cost analysis. The question of how the dynamics among firms in a concentrated industry affect its level of competition has been subject to similarly intense scrutiny by industrial organization economists. We use learning from both of these fields to conclude that, at current levels, common ownership is unlikely to have a meaningful effect on the managerial structure of incentives in ways that the industrial organization theories suggest would affect competition. This conclusion thus cautions against the proposed antitrust reforms, which would solve a non-problem while adding to the costs of the investment vehicles of choice for tens of millions of ordinary
Americans.

Keywords: Common ownership, antitrust, corporate governance

JEL Classification: K21, G23, L40, L13, D43

Suggested Citation

Fox, Merritt B. and Patel, Menesh S., Common Ownership: Do Managers Really Compete Less? (November 19, 2021). Yale Journal on Regulation, Forthcoming, European Corporate Governance Institute - Law Working Paper Forthcoming, Columbia Law and Economics Working Paper No. 656, Available at SSRN: https://ssrn.com/abstract=3967733

Merritt B. Fox (Contact Author)

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Menesh S. Patel

University of California, Davis - School of Law ( email )

Martin Luther King, Jr. Hall
Davis, CA CA 95616-5201
United States

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