Common ownership

What Is Common Ownership?

Common ownership, also known as horizontal shareholding, describes a situation where a single institutional investor holds non-controlling equity stakes in multiple competing companies within the same industry. This phenomenon falls under the broader umbrella of corporate governance and has significant implications for market concentration and the competitive landscape. While individual stakes in each company may be minority positions, the cumulative ownership across an industry by a large investor or a group of large investors can be substantial. The primary concern with common ownership is its potential to reduce competitive incentives among rival firms, possibly leading to less aggressive competition and even higher prices for consumers.¹⁸

History and Origin

The concept of common ownership has existed for a long time, but it gained significant attention and academic scrutiny in the 21st century with the dramatic growth of large institutional investors, particularly index funds and exchange-traded funds (ETFs). As these funds expanded, driven by strategies emphasizing portfolio diversification and passive investing, they naturally accumulated stakes across entire markets, including direct competitors.

Academic research in the 2010s began to rigorously examine the implications of this widespread common ownership, particularly its potential impact on competition. Early studies, notably those focusing on the airline and banking industries, suggested a link between increased common ownership and higher product prices.¹⁷ For instance, a notable paper from 2018, "Anticompetitive Effects of Common Ownership" by Azar, Schmalz, and Tecu, contributed significantly to this debate.¹⁶ The growing body of research prompted regulatory bodies like the Federal Trade Commission (FTC) and the Department of Justice (DOJ) to investigate the potential antitrust implications, acknowledging the need for careful study before considering major policy shifts.¹⁵

Key Takeaways

• Common ownership refers to a single investor holding non-controlling stakes in competing companies within the same industry.
• It has become increasingly prevalent due to the growth of large institutional investors and passive investment strategies.
• The main concern is that common ownership might reduce competitive incentives among rival firms, potentially leading to higher prices or reduced innovation.
• Regulatory bodies are actively examining its implications for antitrust law and market behavior.
• Academic debate continues regarding the precise mechanisms and magnitude of its effects on competition.

Interpreting Common Ownership

Interpreting common ownership involves analyzing the degree to which a single investor, or a small group of large investors, holds shares across multiple firms in a concentrated market. The concern is that even without controlling stakes, these common owners might influence the firms to act less competitively, indirectly benefiting their overall portfolio by preserving profit margins across all their holdings. This perspective challenges traditional economic theory, which assumes companies compete fiercely regardless of their ownership structure, as long as no single entity has outright control.

The potential for reduced competition arises from various mechanisms. For example, common owners might subtly encourage less aggressive pricing or discourage disruptive innovation if it harms other portfolio companies. They could also influence corporate governance decisions, such as board appointments or executive compensation structures, in ways that disincentivize competition. Understanding common ownership requires looking beyond individual company performance to consider the broader market dynamics and the influence exerted by large, diversified shareholders.

Hypothetical Example

Consider two major airlines, "AirConnect" and "FlyFast," that operate on similar routes and are direct competitors. A large institutional investor, "Global Capital Management," owns 8% of AirConnect's outstanding shares and 7% of FlyFast's outstanding shares. Neither of these stakes grants Global Capital Management outright control over either airline, but together they represent significant minority positions in both companies.

In this hypothetical scenario, if Global Capital Management's investment strategy focuses heavily on maximizing returns across its entire portfolio rather than just the performance of individual holdings, it might implicitly prefer a less aggressive price war between AirConnect and FlyFast. For instance, if AirConnect drops its prices significantly to gain market share, it could boost its individual performance but might also hurt FlyFast's profitability, thus potentially reducing Global Capital Management's overall returns from the airline sector. This alignment of interests, driven by common ownership, could subtly lead both airlines to compete less intensely on price, even without direct collusion. This dynamic illustrates how a diversified investor could, through their aggregated holdings, potentially influence the broader competitive landscape.

Practical Applications

Common ownership is a critical consideration in several areas of finance and economics:

• Antitrust Enforcement: Regulators, such as the Department of Justice and the Federal Trade Commission, increasingly scrutinize common ownership when evaluating potential mergers and acquisitions or investigating anticompetitive behavior. They are examining whether these holdings reduce incentives for firms to compete or facilitate information exchange between rivals.¹⁴¹³ The SEC also mandates disclosure of significant equity holdings by institutional investment managers through Form 13F, providing data that can be used to track common ownership patterns.¹²,,¹¹
• Investment Strategy: While diversified portfolios are a hallmark of sound portfolio diversification, the debate around common ownership introduces a nuanced perspective for investors. Those engaged in active management may consider the common ownership landscape within industries when making investment decisions.
• Corporate Strategy: Companies operating in concentrated industries must be aware of their shareholder base and the potential influence of large, common owners. This awareness can impact decisions related to pricing, market expansion, and R&D.
• Economic Research: Common ownership continues to be a fertile area for academic study, with researchers exploring its effects on pricing, innovation, and market efficiency.

Limitations and Criticisms

Despite concerns, common ownership also faces significant limitations and criticisms regarding its purported anticompetitive effects. One major challenge is establishing a definitive causal link between common ownership and reduced competition, as opposed to mere correlation.¹⁰ Critics argue that the statistical models used in some studies may not fully account for all variables or potential reverse causality, where less competitive industries might naturally attract more common ownership.⁹

Furthermore, the mechanisms through which common ownership allegedly impacts competition are debated. While some theories suggest passive institutional investors might subtly influence firms, others contend that such investors, particularly those focused on passive investing, have limited direct control or incentive to interfere with the day-to-day competitive decisions of portfolio companies. They often aim for broad market returns, which benefit from overall economic growth rather than the suppression of competition in specific sectors. Some research even suggests that inter-industry common ownership might be procompetitive.⁸

Another point of contention is the balance between potential antitrust concerns and the benefits of broad portfolio diversification for individual investors, which often entails holding shares across various companies, including competitors. Overly restrictive regulations on common ownership could potentially limit diversification opportunities for millions of stakeholders and increase investment costs.⁷ The debate also highlights that not all common ownership is uniform; the degree of influence can vary greatly depending on the specific investor, their investment mandate, and their engagement practices with portfolio companies.⁶

Common Ownership vs. Cross-Ownership

While both common ownership and cross-ownership involve overlapping equity stakes, they describe distinct corporate structures:

The key difference lies in who holds the overlapping interest. In common ownership, it's a financial investor whose primary goal is typically investment return. In cross-ownership, it's a corporate entity potentially seeking direct strategic advantage over a competitor.

FAQs

Q: Does common ownership mean companies are colluding?

A: Not necessarily. Common ownership refers to the structural fact of a single investor holding shares in multiple competing companies. While some theories suggest it could reduce competitive incentives or facilitate tacit coordination, it does not imply illegal direct collusion or price-fixing agreements.⁴ Regulatory bodies are investigating the possibility of reduced competition, but direct evidence of active collusion due to common ownership is generally not claimed.³

Q: Is common ownership only a concern for large companies?

A: The debate around common ownership primarily focuses on large publicly traded companies within concentrated industries, as this is where the influence of major institutional investors is most pronounced. However, the underlying principles could theoretically apply to smaller markets if there's significant overlapping ownership.

Q: How do regulators monitor common ownership?

A: In the United States, the Securities and Exchange Commission (SEC) requires institutional investment managers managing over $100 million in equities to disclose their holdings quarterly through Form 13F.² This data allows researchers and regulators to track patterns of common ownership. Beyond disclosure, agencies like the Department of Justice and the Federal Trade Commission monitor the market for potential anticompetitive effects and may conduct hearings or issue guidance on the topic.¹

Q: Does common ownership only apply to stock holdings?

A: The term "common ownership" in the context of antitrust and market structure predominantly refers to equity (stock) holdings. While institutional investors may hold other types of assets, the competitive concerns primarily arise from their simultaneous ownership of shares in competing firms, as this grants them a financial interest in the collective performance of an industry.