Thursday, March 21, 2019
C. Scott Hemphill, New York University School of Law and Marcel Kahan, New York University School of Law; European Corporate Governance Institute comment on The Strategies of Anticompetitive Common Ownership.
ABSTRACT: Recent scholarship considers the potential anticompetitive effects when institutional investors hold substantial stakes in competing firms. Empirical evidence reporting that common concentrated owners (“CCOs”) are associated with higher prices and lower output poses a sharp challenge to antitrust orthodoxy and corporate governance scholarship.
We identify and examine the causal mechanisms that might link common ownership to higher prices. We distinguish potential mechanisms along three dimensions: whether the mechanism produces conflict with noncommon owners by inducing actions that raise CCO portfolio value at the expense of firm value; whether the mechanism targets specific firm actions as opposed to affecting firm activities across-the-board; and whether the mechanism is active (rather than passive), in the sense that the CCO undertakes some act in furtherance of its strategy, such as communicating with management or voting.
We consider whether each mechanism is tested by the existing empirical evidence, and whether it is plausible—that is, feasible, effective, and in a CCO’s interest. Our main conclusion is that, for most proposed mechanisms, there is no significant evidence suggesting that institutional CCOs employ them, no strong theoretical basis for believing that they could and would want to do so, or both. The mechanism that is most consistent with the empirical evidence and most plausibly employed by institutional CCOs is selective omission: to press for firm actions that increase both firm value and the CCO’s portfolio value, while remaining passive where the two conflict.
We make three major points. First, several mechanisms emphasized in the literature are not, in fact, empirically tested. Of particular interest, the leading empirical studies are limited to mechanisms that are conflictual and targeted. Second, some mechanisms are infeasible or else ineffective in raising portfolio value. Third, because most institutional investors have only weak incentives to increase portfolio value, it is not in their economic interest to pursue mechanisms that carry significant reputational or legal liability risks.
Our analysis has several important implications. First, any serious analysis of anticompetitive effects must pay careful attention to systematic differences in the incentives of different investor types. Second, CCOs often have procompetitive effects, particularly when they are invested in some but not all firms in an industry. Third, a convincing case for broad reform has not been made. We advocate a searching examination of the steps actually taken by CCOs and firms—the who, where, when and how predicted by the most plausible mechanisms.