The simultaneous ownership of shares in competing firms by institutional investors, known as “common ownership”, has been investigated in several academic studies for its potential impact on competitive conditions (especially in oligopolistic markets). In December 2017, the OECD held a discussion to explore whether there are verifiable theories of harm in connection with common ownership, and whether new approaches are needed to address them.
This discussion built on a roundtable held in February 2008 on the effects on competition of firms holding minority shares in their competitors, and interlocking directorships (where the same individuals sit on the boards of competing firms).
Developments having occurred since the 2008 discussion:
- The rapid growth in passively-managed investment funds, has had a significant impact on the ownership structure of large firms in several industries. These funds diversify their holdings in an industry across firms to reduce exposure to individual firm risk (and track their benchmark index). Examples of substantial investment firm common ownership have been reported in concentrated sectors including finance, air travel, consumer electronics and pharmacies.
- While diversification can reduce a firm’s exposure to firm-specific risk, it can also affect competitive incentives within a market. The portfolio value of an institutional investor with shareholdings in a substantial share of the market could be damaged by aggressive competition between its portfolio companies. Thus, institutional investors may be incentivised to discourage aggressive competition, either by exercising their shares’ voting rights or by exerting more tacit influence. Similarly, firm managers may take into account common ownership interests in decisions about pricing, other competition parameters, cooperation (e.g. joint ventures) and acquisitions. The incentives for managers to do so can be exacerbated by the influence of industry growth in executive pay packages, meaning that an active approach by institutional investors in the management of their portfolio firms may not be necessary for potential competition problems to arise.
- Recent econometric studies have expressed differing views of the likely impact on competitive conditions of common ownership by institutional investors or other large financial firms.
- However, measuring the impact of common ownership and using competition policy to address any associated competition problems can be challenging. There is a debate about the utility and feasibility of using modified Herfindahl-Hirschman or price pressure indices to take into account common ownership. More generally, the degree to which common ownership represents a significant competition problem and the feasibility of addressing it via competition policy remains highly uncertain.
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