Thursday, April 20, 2017
Edward B. Rock, New York University School of Law and Daniel L. Rubinfeld, University of California at Berkeley - School of Law; National Bureau of Economic Research (NBER); NYU Law School are Defusing the Antitrust Threat to Institutional Investor Involvement in Corporate Governance.
ABSTRACT: Thirty years of regulatory reform has focused on encouraging diversified institutional investor involvement in corporate governance. Recently, some intriguing recent economic research by Azar, Schmalz and Tecu (working paper 2015) and Azar, Raina and Schmalz (working paper 2016) purports to show that concentration among shareholdings has led to higher prices in the airline and banking industries, two concentrated industries. Based on this research, Einer Elhauge (2016) has argued that current ownership patterns by diversified institutional investors violate Section 7 of the Clayton Act. Following on Elhauge, Posner, Weyl and Scott Morton (working paper 2016) propose a “solution” in which diversified investors would be limited to acquiring one firm in any oligopoly.
In this article, we critique the economic evidence, focusing on the airline industry. We then challenge Elhauge’s legal analysis and critically examine Posner et al’s proposals. Although we are unconvinced by the rather broad claims of the existing literature, we agree that an open discussion of the antitrust implications of common ownership by large institutional investors is appropriate. Thus, in the final section, we sketch out proposed “Antitrust Guidelines,” including a safe harbor, in an effort to prevent anticompetitive effects, while continuing to encourage institutional investors’ involvement in corporate governance.