Common Ownership in America: 1980-2017; and Testing for Common Ownership (joint with Matthew Backus and Christopher Conlon)

About this event

When competing firms possess overlapping sets of investors, maximizing shareholder value may provide incentives that distort competitive behavior, affecting pricing, entry, contracting, and virtually all strategic interactions among firms. We propose a structurally consistent and scaleable approach to the measurement of this phenomenon for the universe of S&P 500 firms between 1980 and 2017. Contrary to popular intuition, this is not primarily associated with the rise of BlackRock and Vanguard: instead, the trend in the time series is driven by a broader rise in diversified investment strategies, of which these firms are only the most recent incarnation. In the cross-section, there is substantial variation that can be traced, both in the theory and the data, to observable firm characteristics. We show how common ownership can theoretically give rise to incentives for expropriation of undiversified shareholders via tunneling. Finally, we develop a framework for testing for price effects of common ownership in differentiated goods markets. We apply this test to the US market for ready-to-eat cereals.