How common ownership affects competition is a source of acute disagreement among scholars and policymakers, with some who believe common ownership depresses competition seeking antitrust law reforms that would significantly constrain how investment funds operate. Neglected in this vigorous debate, however, is a careful analysis of how firm managers – the persons who in the first instance actually make the decisions that determine an industry’s competitiveness – would act differently in the presence of common ownership.
We conduct that necessary analysis in a new article, available here, in which we combine lessons from corporate governance scholarship and industrial organization economics to assess whether common ownership is expected to alter managerial incentives to compete. We conclude that, at least at current levels, common ownership is unlikely to be exerting a meaningful effect on the managerial structure of incentives in ways that the industrial organization theories suggest would affect competition.
Our article makes four key points, none of which has been given in-depth attention in the debate so far concerning common ownership’s effect on competition:
1. The common ownership literature’s critical assumption: Firm managers have a concern with boosting other firms’ net revenues. The theoretical and empirical work suggesting that common ownership reduces competition rests on the assumption that firm managers adhere to the preferences of the firm’s common owners and seek to maximize not just their own firm’s net revenues, but also the sum of its net revenues and, to one extent or another, the net revenues of rival firms.
2. The firm’s non-common shareholders do not share the common owners’ competition-related preferences. The common ownership literature glosses over a sharp conflict between the competition-related preferences of a firm’s common and non-common owners. While the common owners may prefer that firm management make competition-related decisions with an eye trained partially on the effects of those decisions on the net revenues of rival firms, the non-common owners want firm managers to focus solely on their firm’s net revenue maximization.
3. The preferences of an oligopolistic firm’s managers are likely aligned with the competition-related preferences of the non-common shareholders. In terms of their own preferences, the managers of an oligopolistic firm would likely want to choose the higher level of competition preferred by the firm’s non-common shareholders. The managers’ positions in the firm are to an extent likely to give them a variety of benefits that most people would desire. A firm’s ability to provide its managers with these desired benefits is maximized if firm managers focus on their own firm’s net revenue maximization.
4. Management’s structure of incentives will determine the output level management chooses, and the current level of common ownership will not alter these incentives relative to a baseline of no common ownership. The incentives of management have been the central focus of the study of corporate governance over the last few decades, a study usually characterized as concerning the agency costs of management. If common ownership were to alter managerial decision-making, it would be through changing this already familiar incentive structure, one that consists of a number of sticks and carrots, including proxy fights, activist campaigns, the design of executive compensation, and various other incentive-structuring devices. A careful examination of these sticks and carrots suggests that none of them is changed meaningfully by the current level of common ownership relative to there being no common ownership at all.
Our analysis leads to the conclusion that common ownership, at least at current levels, is not resulting in firms competing any differently than if there were no common ownership. This conclusion thus cautions against the proposed antitrust reforms, which would solve a non-problem while adding to the costs of the investment vehicles of choice for tens of millions of ordinary Americans.
This post comes to us from professors Merritt B. Fox at Columbia Law School and Menesh S. Patel at the University of California, Davis – School of Law. It is based on their recent article, “Common Ownership: Do Managers Really Compete Less?,” available here.