Friday, October 19, 2018
C. Scott Hemphill, New York University School of Law and Marcel Kahan, New York University School of Law; European Corporate Governance Institute explain The Strategies of Anticompetitive Common Ownership.
ABSTRACT: Recent scholarship considers anticompetitive effects of concentrated ownership. Empirical evidence reporting that common concentrated owners (“CCOs”) are associated with higher prices and lower output seems to confirm such effects, posing a sharp challenge to both antitrust orthodoxy and corporate governance scholarship.
We identify and examine the causal mechanisms that could link common ownership to higher prices. To do so, we offer a typology of potential mechanisms that varies along three dimensions: whether CCOs induce anticompetitive actions by a firm that raise portfolio value at the expense of firm value or induce actions by a firm that raise portfolio value as well as firm value (firm value-decreasing versus firm value-increasing mechanisms); whether a mechanism operates at the firm level or is instead targeted to specific firm actions (macro versus micro mechanisms); and whether the CCO induces anticompetitive effects through affirmative activities, such as communicating with management or voting on certain proposals, or instead by remaining passive (active versus passive mechanisms).
We make three major points. First, several mechanisms emphasized in the literature are not, in fact, empirically tested. Of particular interest, most empirical studies do not test firm value-increasing mechanisms or macro mechanisms. Second, some mechanisms are ineffective in raising portfolio value or else infeasible. These problems, which afflict numerous value-decreasing mechanisms and micro mechanisms, include the difficulties institutional CCOs would face in generating, transmitting, and inducing management to accept the anticompetitive strategy. Third, institutional investors have only weak incentives to increase portfolio value. As a result, they would not want to employ any mechanism that generates significant potential reputational costs or legal liability.
Our main conclusion is that, for most proposed mechanisms, there is no strong theoretical basis for believing that institutional CCOs would want to employ them or else no significant evidence suggesting that they do employ them (or both). The mechanism that is most plausibly employed by institutional CCOs is selective omission: to press for (some) firm actions that increase both firm value and portfolio value, while remaining silent as to actions where the two conflict.
We also spell out several implications of our analysis. First, CCOs have ambiguous welfare effects. While their conduct may result in higher prices in some markets, they may also prompt increased efficiency and lower prices in other markets. Second, index funds — the paradigmatic common owners — are ill-equipped to employ selective omission or other micro mechanisms. Third, the case for broad reform has not been made. Such reforms are ineffective in dealing with passive mechanisms and counterproductive, imposing new costs without generating significant procompetitive effects for consumers. We advocate a more searching examination of the steps actually taken by CCOs and firms — the who, where, when and how predicted by the most plausible mechanisms.