Over the last two decades, the dramatic increase in institutional investors’ ownership of rival companies has raised questions about collusive corporate policies. However, it is still unclear how common shareholders engage with and influence corporate decision-making, especially when it comes to antitrust issues (Ginsburg and Klovers, 2018; Scott Morton and Hovenkamp, 2017; Hemphill and Kahan, 2019).
One frequently mentioned mechanism is board representation (Azar 2021; Eldar, Grennan, and Waldock, 2021). Its plausibility rests on the well-settled principle in U.S. corporate law that directors are responsible for making all major corporate decisions (Bebchuk, 2004). Given their considerable ownership stake in U.S. public firms, it is conceivable that institutional shareholders are widely represented in the boardroom of U.S. public firms so that common institutional shareholders can coordinate rival firms through their board representatives. Despite the plausibility of this theory, little empirical research seeks to verify it. This paper fills that void. To our surprise, our key finding shows that shared board representation is unlikely to have much explanatory power for the underlying trend of increasing firm profitability associated with common ownership.
First, we find that institutional investors are strongly under-represented on the boards of U.S. public firms relative to their enormous collective ownership. Out of 81,463 Compustat firm-years during 1999-2016, only 6,203 (7.61 percent) firm-years feature at least one institutional director representing an institutional shareholder owning at least 1 percent of outstanding shares. Moreover, we find that, among the small overall number of institutional directors, there is a predominance of bank directors and directors representing sophisticated investors (i.e., hedge funds, venture capital, or private equity), with a share of 41 percent and 35 percent, respectively. Directors representing independent investment companies, which include large mutual fund companies like BlackRock and Vanguard, account for a relatively modest share of only 16 percent of all institutional directors.
Our second finding is that common (i.e. overlapping in the sense of owning shares in both companies) institutional shareholders between rival firms rarely establish joint board representation in both firms. Out of 2,736,451 intra-industry firm pairs with at least one common institutional shareholder owning more than 1 percent of outstanding shares in both firms, only 278 (0.01 percent) firm pairs feature a common institutional director, and 823 (0.03 percent) firm pairs two institutional directors representing the same institutional investor, respectively. The findings suggest that common institutional directors between rival firms are extremely rare.
Our third finding is that additional joint board representation does not correlate significantly with higher firm profitability after controlling for common institutional ownership. We distinguish between common institutional shareholders with joint board representation in rival firms and common institutional shareholders without such joint board representation. The former effect on firm profitability is not significantly different from the latter across all specifications we examine. This result is consistent with the infrequency of joint board representation by common institutional shareholders.
Our fourth finding concerns the contrast in board representation between institutional and non-institutional shareholders such as high wealth individuals. Only 37,348 rival firm pairs show common ownership by non-institutional shareholders compared with almost 3 million rival firm pairs with common ownership by institutional shareholders. But while infrequent among U.S. public firms, common non-institutional shareholders are roughly 100 times more likely to seek and obtain overlapping board representation than common institutional shareholders.
We conclude that institutional directors are unlikely to constitute an economically significant mechanism for coordinating corporate policies because of their statistical insignificance in U.S. public firms. We highlight that this conclusion does not preclude common ownership from having anticompetitive effects through mechanisms other than board representation, or board overlap unrelated to common institutional ownership from being an important determinant of firm conduct (Geng et al., 2022). So far, corporate research has settled neither of these two issues. However, the policy concern about board overlap as a consequence and “representation” of common institutional ownership is largely a red herring in the light of its empirical insignificance.
Antón, M., Ederer, F., Giné, M., & Schmalz, M. C. (2022). Common ownership, competition, and top management incentives, Journal of Political Economy, forthcoming.
Azar, José. (2021). Common Shareholders and Interlocking Directors: The Relation Between Two Corporate Networks, Journal of Competition Law & Economics.
Azar, J., Schmalz, M. C., & Tecu, I. (2018). Anti-competitive effects of common ownership. The Journal of Finance, 73(4), 1513-1565.
Bebchuk, L. A. (2004). The case for increasing shareholder power. Harvard Law Review, 118(3), 833-914.
Eldar, O., Grennan, J., & Waldock, K. (2020). Common ownership and startup growth. Duke Law School Public Law & Legal Theory Series, (2019-42).
Geng, H., Hau, H., & Lai, S. (2021). Does Shareholder Overlap Alleviate Patent Holdup. Working Paper.
Geng, H., Hau, H., Michaely, R., & Nguyen, B. (2022). Does Board Overlap Promote Coordination Between Firms? Swiss Finance Institute Research Paper.
Ginsburg, D. H., & Klovers, K. (2018). Common sense about common ownership. Available at SSRN.
Harford, J., Jenter, D., & Li, K. (2011). Institutional cross-holdings and their effect on acquisition decisions. Journal of Financial Economics, 99(1), 27-39.
He, J. J., & Huang, J. (2017). Product market competition in a world of cross-ownership: Evidence from institutional blockholdings. Review of Financial Studies, 30(8), 2674-2718.
He, J. J., Huang, J., & Zhao, S. (2019). Internalizing governance externalities: The role of institutional cross-ownership. Journal of Financial Economics, 134(2), 400-418.
Hemphill, C. S., & Kahan, M. (2019). The strategies of anticompetitive common ownership. Yale Law Journal, 129 (5), 1392-1459.
Lewellen, K., & Lowry, M. (2021). Does common ownership really increase firm coordination? Journal of Financial Economics, 141(1), 322-344.
Matvos, G., & Ostrovsky, M. (2008). Cross-ownership, returns, and voting in mergers. Journal of Financial Economics, 89(3), 391-403.
Morton, F. S., & Hovenkamp, H. (2018). Horizontal shareholding and antitrust policy. The Yale Law Journal, 2026-2047.
Park, J., Sani, J., Shroff, N., & White, H. (2019). Disclosure incentives when competing firms have common ownership. Journal of Accounting and Economics, 67(2-3), 387-415.
 Such corporate policies include acquisitions (Matvos and Ostrovsky, 2008; Harford, Jenter, and Li, 2011); executive compensation (Anton, Ederer, Gine, and Schmalz, 2022); disclosure policy (Park, Sani, Shroff, and White, 2019); corporate governance (He, Huang and Zhao, 2019); and the reduction of patent holdup (Geng, Hau, and Lai, 2021). See also He and Huang, 2017; Azar, Schmalz, and Tecu, 2018; Antón, Ederer, Giné, and Schmalz, 2022; Lewellen and Lowry, 2021.
 For example, Judge Douglas Ginsburg and his colleague at the U.S. Court of Appeals for the District of Columbia Circuit states “Most proponents of antitrust enforcement against common ownership … simply assume a causal relationship. This is particularly problematic because, as even proponents acknowledge, the mechanism of harm is unknown.” Scott Morton and Hovenkamp (2017, p. 2031) claim, “The theoretical literature to date does not identify what mechanism funds may use to soften competition.
This post comes to us from Heng Geng at Victoria University of Wellington, Harald Hau at the University of Geneva, Roni Michaely at the University of Hong Kong, and Binh Nguyen at RMIT University Vietnam. It is based on their recent paper, “Do Institutional Directors Matter?” available here.