Common Ownership in America: 1980–2017

Abstract

We empirically assess the implications of the common ownership hypothesis from a historical perspective using the set of S&P 500 firms from 1980 to 2017. We show that the dramatic rise in common ownership in the time series is driven primarily by the rise of indexing and diversification and, in the cross section, by investor concentration, which the theory presumes to drive a wedge between cash flow rights and control. We also show that the theory predicts incentives for expropriation of undiversified shareholders via tunneling, even in the Berle and Means (1932) world of the widely held firm. (JEL D22, G32, G34, L21, L25)

Testing the Theory of Common Stock Ownership

“…if a large fund decides that it wants to hold only the top competitors in the industry. The fact that MHHI is endogenous has led to work deriving simple unilateral effects metrics as in Backus et al (2019b), who analyze a more general model in which common ownership incentivizes firms to maximize their own profits as well as a weighted average of rivals' profits. We provide an overview of that model in Section 5.1.…”

“…Azar et al (2018b) provides multiple examples of industries in which top institutional shareholders hold large blocks of stock in each of the relevant firms, including airlines, banks, and supermarkets. To develop a sense of how important these trends are, we display in Figure 1 a graph from Backus et al (2019b). The authors calculate profit weights using historical data on common ownership.…”

“…We choose and then formally define these measures. As motivation for our choices, we first review a simple model of firm behavior under the common ownership hypothesis and derive profit weights following Backus et al (2019b). We then discuss how the incentives reflected by profit weights relate to tacit collusion and describe and calculate metrics that reflect the similarity of owners of firm pairs.…”

“…We follow Backus et al (2019b) in their definition and calculation of profit weights who, as discussed, build on earlier work by Rotemberg (1984), Bresnahan andSalop (1986), andO'Brien andSalop (2000). They extend the basic framework of own-firm profit maximization to one in which firms maximize cash flows to their investors, which results in managers who place positive weights on rivals' profits.…”

“…Following (Backus et al, 2019b), we exploit the fact that kappa may be decomposed into a cosine similarity measure and a ratio of the relative ownership concentration of investors of the entrant and the incumbent. An increase in cosine similarity predicts an increase in returns, whereas more concentration on the part of owners of the entering security predicts a slight decrease in returns.…”