The Effects of Common Ownership on Customer-Supplier Relationships

Abstract

The increasing prevalence of institutional ownership of corporate equity creates many cases where two firms are owned by the same institutional investors. If these two firms have the ability to influence each other's profits, the presence of common owners can affect how the firms interact, since they share the goal of maximizing the wealth of the same owners. In this study, I address whether common ownership (defined as the extent to which firms are held by the same institutional investors) in customer firms and supplier firms strengthens supply chain relationships. I find common ownership increases the longevity of customer-supplier relationships. These results are stronger in cases where theory predicts the trade relationships are more likely to be plagued by supply chain frictions. Using an instrument constructed around a shock to common ownership due to a large mutual fund scandal in 2003, I find evidence that the relationship between common ownership and vertical relationship strength is causal.