Why Doesn’t Common Ownership Cause Anti-Competitive Effects?

Abstract

Recent studies argue that institutional common ownership in rival firms may reduce competition in product markets. Yet, empirical evidences are mixed. I re-examine this hypothesis, documenting that competition for flows on the ground of relative performance reduces institutional investors’ ability to shift firm managers’ incentives to internalize product market externalities. Empirically, I show that the existence (static effect) and sustainability (dynamic effect) of the anti-competitive consequences of common ownership depend critically upon the degree of competition faced by relevant institutional investors. These findings emphasize the importance of accounting for asset managers’ incentives and strategic interactions when assessing the product market consequences of institutional common ownership.