The common ownership hypothesis: Theory and explanation

This report surveys recent literature examining the relationship between ownership of firms in the financial space and the strategic decisions made by firms in product markets, paying particular regard to the common ownership hypothesis. This hypothesis is an old idea, with a history dating back to...

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Bibliographic Details
Published in:Policy File 2019
Main Authors: Backus, Matthew, Conlon, Christopher, Sinkinson, Michael
Format: Report
Language:English
Subjects:
Banking/Finance
Economic policy
The Brookings Institution
Online Access:Request full text
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Summary:This report surveys recent literature examining the relationship between ownership of firms in the financial space and the strategic decisions made by firms in product markets, paying particular regard to the common ownership hypothesis. This hypothesis is an old idea, with a history dating back to the 1980s. What has renewed interest in this hypothesis is the increasing concentration among investment managers and new instruments for investing in diversified portfolios. The introduction of 401(k) defined-contribution retirement plans led to a rise in diversified portfolios because of the rise of mutual funds, index funds, and exchange-traded funds. At the beginning of 2018, the four largest asset managers managed over $16 trillion in assets, and for 88 percent of firms on the S&P 500 Index, the largest shareholder was one of those four asset managers. Under one model of corporate governance that embraces a strict interpretation of the common ownership hypothesis, the authors calculate that in 1980 an average S&P 500 firm would have valued a dollar of profits to another randomly chosen S&P 500 component firm at 20 cents. By the end of 2017, this more than tripled to approximately 70 cents. If common ownership incentives translate to firm behavior, this rise would give firms an incentive to raise prices even in the absence of collusion (which would be illegal).