A new empirical study attempts to estimate the welfare costs of common ownership across the economy. The authors find that they are large and have increased dramatically over the last quarter century, particularly over the last decade.
A large part of the stock market is now owned by a few giant asset management companies. BlackRock just surpassed $10 trillion in assets under management. Vanguard has more than $7.2 trillion in assets under management. Fidelity has more than $4.2 trillion under management.
This trend has become widely known among economists as the rise of common property (or horizontal participation)—an arrangement in which large investors own shares in several competing companies. It has the potential to discourage companies’ incentives to compete aggressively to such an extent that some antitrust scholars argue that common ownership constitutes “the greatest anticompetitive threat of our time”. Indeed, the Department of Justice, the Federal Trade Commission, the European Commission, and the OECD have acknowledged concerns about the anticompetitive effects of common ownership. Earlier this year, the Justice Department and the Federal Trade Commission launched a public inquiry seeking comment on new evidence of the effects of mergers and acquisitions on competition to inform possible revisions of the merger guidelinesincluding how to deal with common property.
The call “Common property hypothesis” challenges the conventional wisdom that earnings and shareholder value are the same thing. The intuition of this hypothesis is simple. Imagine two companies, A and B, that are competing with each other. If any investor owns a significant interest in both A and B, and the managers of both companies make decisions with the intention of maximizing the income earned by the company’s shareholders (rather than maximizing the profits of a single company), then Company A’s management considers how aggressive pricing decisions will negatively affect the profits of Company B, which is partly owned by the common owner. Firm B will do exactly the same thing with respect to firm A. The presence of a common owner results in A and B competing less aggressively: both firms end up charging higher prices, making higher profits, and consumers are worse off. Crucially, all of this occurs without any collusion between A and B. Although antitrust authorities have the power to investigate and prosecute companies that collude or abuse their market power to harm consumers, anticompetitive conduct facilitated by common ownership it represents a “gray area” that does not fall under the umbrella of typical antitrust enforcement.
as it grows empirical evidence Despite the anticompetitive effects of common ownership on prices, quantities, margins, managerial incentives, and profitability in particular industries, little is known about the economy-wide welfare cost of common ownership and its distributional impact, and for a good reason. Measuring the welfare cost of common property is complex. It requires new economic models and large amounts of granular data. It requires knowledge of both the competitive landscape (which pairs of companies compete with each other) and asset markets (which shares of the company each investor owns).
in a new study, we ask: What happens if companies maximize shareholder value (rather than profit)? What is the resulting impact of common ownership on corporate profits, consumer surplus, and total welfare in many different industries? In summary, we find that the economic impact of common property is large and has increased dramatically over the last quarter century and particularly over the last decade.
In our article, we develop a new macroeconomic model that includes all public corporations in the United States and uses annual data since 1994. In our model, we can think of these companies as being connected through two large networks: a network of product similarity and a network of common property.
The product similarity network, depicted on the left side of Figure 1, captures the extent to which companies compete with each other in the product market. Each dot on the graph is a publicly traded company in the United States, and the network links represent closeness in the product space. Firms offering more similar products are closer together in the product space and therefore compete more intensely with each other; More “insulated” companies face less intense competition and therefore end up charging higher margins. The data underlying this chart is developed by Hoberg and Phillips (2016). Using a methodology developed by Pellegrino (2019)our model uses this data as a “map” of the product market.
The common ownership network reflects which investors own which companies and how much ownership overlap exists between competing companies. It is depicted on the right side of Figure 1. Companies with a large proportion of shares held by the same investors have less incentive to compete because doing so would hurt the portfolio returns of their larger and more influential owners. The source data on institutional holdings that we use to build this network comes from 13(f) formsthat are filed with the SEC by large institutional investors.
The extent to which common ownership lowers firms’ incentives to compete depends on how much these two networks overlap; In other words, common ownership has the strongest effects on pairs of firms that are owned by a few similar investors and produce similar products. By combining data from company financials, text-based product similarity, and institutional investor holdings of publicly traded corporations in the US from 1994 to 2018, we can measure how much the overlap in ownership between companies competitive behavior as well as the economy. the toll that this reduction in competitiveness has on consumers.
Our analysis reveals three general patterns. First, the welfare costs of common ownership are significant (Figure 2). We estimate that in 2018, the most recent year in our sample, the deadweight loss due to common ownership was $400 billion, equal to about 4 percent of the surplus generated by US public companies. This is a dollar measure of the economic value that is lost as a result of holding shares horizontally. Second, common ownership has large distributional consequences: it redistributes surplus from consumers to corporations. In 2018 alone, common ownership increased aggregate corporate profits by $378 billion (6.6 percent), but reduced consumer surplus by $799 billion (nearly 20 percent). Third, the negative effects of common ownership on total welfare and consumer surplus have increased considerably in the last two decades. While common ownership reduced the economy’s total surplus by a mere 0.3 percent in 1994, this deadweight loss increased more than tenfold to 4 percent over the next quarter century.
All of these results are based on the (standard) assumption that company managers weight the earnings of their respective shareholders in proportion to the size of their holdings.
A common criticism of this assumption is that it does not reflect realistic models of corporate governance and decision making. For example, Agency problems between owners and managers can attenuate or even exacerbate the anticompetitive effects of common ownership.. Therefore, in our study we also investigate how alternative assumptions about corporate governance modify these results. Instead of investors directly influencing company decisions in exact proportion to their ownership shares, larger investors can exert influence that exceeds the size of their holding. Under such an alternative super proportional influence assumption, common ownership has nearly identical effects on deadweight loss, corporate profits, and consumer surplus. The anticompetitive effects we estimate remain large, even if we relax the assumption that investors can effectively control all the companies in their portfolios, or that only block shareholders (that is, shareholders who own 5 percent or more than a company’s actions) can influence management. : Common ownership still leads to a deadweight loss of 2.5 percent of total surplus, increases company profit by almost 5 percent, and reduces consumer surplus by almost 13 percent of total surplus in 2018.
In summary, our analysis suggests that increased common ownership has the potential to generate significant distortions and the reallocation of surpluses in the US economy. However, academic research has only begun to scratch the surface when it comes to the welfare effects of common property. Several other consequences of common ownership on firm decision-making, including labor market power, firm innovation, productivity and profitability, and dynamic incentives for collusion still await investigation. In light of the meteoric rise of common ownership and its relevance to antitrust policy and financial regulation, our paper presents several reasons for policymakers and regulators to pay more attention to this topic.
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