Common Ownership and Hedge Fund Activism: An Unholy Alliance?

64 Pages Posted: 21 May 2024

See all articles by Zohar Goshen

Zohar Goshen

Columbia Law School; European Corporate Governance Institute (ECGI); Ono Academic College Faculty of Law

Doron Levit

University of Washington, Foster School of Business; European Corporate Governance Institute (ECGI); Center for Economic and Policy Research

Date Written: May 20, 2024

Abstract

This paper proposes a novel mechanism linking common ownership to anticompetitive outcomes. Common owners promote shareholder-friendly governance policies in their portfolio firms, empowering interventions by activist hedge funds that discourage managers from investing. The cumulative impact of hedge fund activism contributes to anticompetitive outcomes, without collusion between managers. Effectively, and possibly unintentionally, common owners exert monopsonistic power over labor by reducing aggregate investment. Subsequently, the artificially depressed wages result in transfer of wealth to shareholders. While hedge fund activism generally improves social welfare in a competitive equilibrium, it may reduce social welfare under common ownership. The symbiotic relationship between common owners and activist hedge funds can be detrimental to society. The paper establishes a new connection between the rise of institutional ownership, adoption of shareholder-friendly policies, increased hedge fund activism, reduced investment and labor share, and heightened capital market returns.

Keywords: Corporate Governance, Common Ownership, Market Power, Shareholder Rights, Hedge Fund Activism, Agency Costs, Principal Costs

JEL Classification: D74, D83, G23, G34, K22

Suggested Citation

Goshen, Zohar and Levit, Doron, Common Ownership and Hedge Fund Activism: An Unholy Alliance? (May 20, 2024). European Corporate Governance Institute – Finance Working Paper No. 982/2024, Available at SSRN: https://ssrn.com/abstract=4835079 or http://dx.doi.org/10.2139/ssrn.4835079

Zohar Goshen

Columbia Law School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Ono Academic College Faculty of Law

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Kiryat Ono, 55000
Israel

HOME PAGE: http://www.ono.ac.il

Doron Levit (Contact Author)

University of Washington, Foster School of Business ( email )

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Seattle, WA 98195
United States

HOME PAGE: http://https://sites.google.com/view/doronlevit

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Center for Economic and Policy Research ( email )

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