Common Institutional Ownership and Product Market Threats

Abstract

The common ownership of firms can have anticompetitive effects by incentivizing collusive outcomes that maximize joint surpluses of the commonly held firms or procompetitive effects through enhanced knowledge spillovers. Using a difference-in-differences regression methodology that exploits mergers between financial institutions as exogenous shocks to common ownership, our baseline results suggest that higher common ownership leads to greater product market fluidity (a text-based metric of competition) and generally leads to more product development and higher investments. These findings suggest that, on average, common ownership spurs dynamism in product spaces rather than tacit collusion between cross-held competitors. This is especially true in economic environments in which it is easier to take advantage of knowledge spillovers. However, common ownership can also inhibit product market competition and dynamism, especially in industries more prone to quasi-monopoly outcomes in product spaces. Implementing a one-size-fits-all regulatory policy limiting common ownership may be harmful in industries with strong spillover opportunities. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4830 .

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