Facilitating Tacit Collusion: A New Perspective on Common Ownership and Voluntary Disclosure

Common ownership (competing firms with overlapping ownership) has become increasingly prevalent over the last several decades. Recent studies of the phenomenon have produced two important findings.  First, common ownership is associated with less intense competition. Studies posit that managers act in accordance with the preference of common owners for anti-competitive actions that lead to higher group profits rather than cutthroat actions that maximize individual firm profits. Second, common ownership is associated with more voluntary disclosure, which recent work has  attributed to the lower costs of disclosure arising from the reduced competition and common owners’ demand more disclosure. We predict and find support for an alternative explanation for the increased disclosure: Commonly owned firms increase disclosure to facilitate tacit collusion.

Our study proposes that competing firms with common owners are more likely to take coordinated actions (i.e., tacitly collude) to facilitate higher profits, which helps explain why commonly owned firms provide more disclosure. We predict that communication facilitates both coordinating anti-competitive behavior (e.g., pricing strategy) as well as monitoring defection from the common strategy. While many forms of private communication among firms are illegal, we conjecture that public disclosure serves as an allowable alternative coordinating and monitoring mechanism.

We conduct several analyses that suggest the positive relation between common ownership and disclosure is, at least in part, attributable to tacit collusion. First, we expect the relationship between common ownership and disclosure to weaken in industries with characteristics that would make tacit collusion more difficult. Collusion should be more difficult in industries with many firms (it is more challenging to coordinate across large groups), with uncertain demand (boom-bust cycles give firms incentives to defect from collusive strategies), and in which firms have variable cost structures (it is more difficult to find a focal point around which to collude). Consistent with these predictions we find the positive relation between common ownership and disclosure weakens in industries with many firms, uncertain demand, and varied cost structures.

Second, we consider the influence of alternative non-public communication channels that should alter the need for public disclosure to coordinate and monitor the anti-competitive actions required for tacit collusion. On one hand, these channels could act as substitutes for public disclosure, rendering public disclosure less necessary for coordinating and monitoring. Alternatively, they could act as complements when public disclosure alone is insufficient to both coordinate and monitor. Our results suggest having more overlapping directors mitigates the need for public disclosure (i.e., acts as a substitute). However, having more trade association events enhances (i.e., complements) the positive association. One plausible interpretation for why trade associations would complement public disclosure is that tacit collusion requires communication for two purposes: coordinating and monitoring. The types of interactions occurring at trade events (e.g., discussion forums on recent sales trends) may better serve the monitoring role, leaving public disclosure to facilitate the more forward-looking coordinating role.

Finally, we evaluate alternative measures of disclosure that are likely to contain information useful in tacit collusion. In the majority of our analysis we use management forecasts, as they are  a well-established measure of forward looking information that is used by a diverse set of firms. We also evaluate three text-based disclosure measures: the amount of sales guidance in the earnings announcement, whether managers cite outstanding confidential treatment requests in the 10-Q or 10-K, and the proportion of numbers in the earnings announcement. These measures should aid in the coordinating and monitoring required for tacit collusion.  First, sales related disclosure facilitates communication about market-wide demand and competitor pricing strategies. Second, firms engaged in collusive behaviors are less likely to redact information. Finally, greater specificity (i.e., a higher proportion of numbers in the text) makes it easier to identify a focal point, coordinate actions, and monitor for defection from the coordinated strategy. We find common ownership is associated with each of these measures, as expected.

Our study provides new insight into the role of shareholders in management decision-making and expands the growing literature on strategic firm behaviors, especially as related to tacit collusion or coordination among firms. Moreover, while existing literature shows common ownership is associated with anti-competitive outcomes, it is inconclusive on how these anti-competitive outcomes are achieved. In this study, we provide evidence consistent with tacit collusion facilitating anti-competitive outcomes via public disclosure.

Finally, existing literature has shown that the competitive dynamics around common ownership are associated with increased disclosure. In addition to competition changing the costs and benefits of disclosure, we provide evidence that disclosure plays a direct role in the common ownership-competition relation by allowing managers of commonly owned firms to maximize joint profits through tacit collusion.

This post comes to us from professors Andrea Pawliczek at the University of Missouri at Columbia, A. Nicole Skinner at the University of Georgia, and Sarah Zechman at the University of Colorado at Boulder. It is based on their recent article, “Facilitating Tacit Collusion: A New Perspective on Common Ownership and Voluntary Disclosure,” available here.