Researchers working for the NBER have made an interesting case that high levels of common ownership in companies could be anti-competitive. This trend is exacerbated by high levels of indexing, as a greater percentage of publicly traded shares are owned by the same index funds. Bloomberg reports:
The rise of indexing mutual funds and other diversified investors is increasing the temptation for public companies to act in the interests of their rivals, a trio of professors say.
Their study, “Common Ownership in America: 1980-2017,” is the latest entry in a growing body of research looking into whether the expanding influence of giant shareholders like passively managed funds is making American companies less willing to compete. When so many businesses have the same owners, the theory goes, rivalries between them weaken, as firms face growing incentives to keep people other than their customers and employees happy.
The paper shows implied incentives linked to common ownership have risen to “economically significant” levels. But large indexers like BlackRock Inc., Vanguard Group Inc. and State Street Corp. have an “ambiguous relationship” to this trend, which effectively predates their march to preeminence.
To test the thesis, the researchers examined something called “profit weight” — how much value a company theoretically places on its peers’ earnings in light of common ownership. They found it surged from 0.2 in 1980 to 0.5 by 1999 to almost 0.7 in 2017, according to models they developed. Zero would suggest firms do nothing but maximize their own profit, while 1 means “full collusion” or “the weight a merged firm places on an acquired subsidiary,” according to the paper.
Jeremy Jones, CFA
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