Recent Studies on Common Ownership, Firm Behavior, and Market Outcomes

• DOI: 10.1177/0003603X20985804
• Date: 01 March 2021
• Published date: 01 March 2021
• Subject Matter: Articles

Article

Recent Studies on Common

Ownership, Firm Behavior,

and Market Outcomes

Martin C. Schmalz*

Abstract

The literature on competitive effects of common ownership has grown at a fast rate in the past two

years. Anticompetitive effects have been confirmed with alternative reduced-form and structural esti-

mation methods,in different industries,geographies, and jurisdictions. Multiple independent studies have

disproven early critiques of the literature. Other papers document the heterogeneity of common

ownership effects on competition across markets and industries. Importantadvances were made on the

study of the economic mechanisms andgovernance channels that implement anti-competitive incentives.

New theory refines the interpretation of existing empirical work. Access to high-quality ownership and

product-market data remains a bottleneck for meaningful research in the area.

Keywords

ownership, control, industry concentration, antitrust, competition, managerial incentives, corporate

governance

Introduction

The documentation of likely anticompetitive effects of common ownership in specific U.S. airline

markets

1

has triggered an explosion of research on the effects of common ownership on competition

and corporate behavior. In this review, I seek to give some structure to the latest work in this area. I will

selectively cover a few of the more prominent papers that have emerged since the publication of the

last review.

2

I will also cover some important papers that had escaped my attention then. I focus on

the papers in the economics and finance literatures, as Elhauge has recently covered developments in

the legal literature.

3

By covering relatively few papers in depth, I will illustrate key issues for the

literature’s future development.

* University of Oxford, OMI, CEPR, ECGI, CESIfo, University of Cologne, and C-SEB

Corresponding Author:

Martin C. Schmalz, University of Oxford, Oxford OX1 1HP, United Kingdom.

Email: martin.schmalz@sbs.ox.ac.uk

1. Jos´e Azar et al., Anticompetitive Effects of Common Ownership,73J.FIN. 1513 (2018) [hereinafter AST].

2. Martin C. Schmalz, Common-Ownership Concentration and Corporate Conduct,10A

NN.REV.FIN.ECON. 413 (2018).

3. See Einer Elhauge, How Horizontal Shareholding Harms Our Economy—And Why Antitrust Law Can Fix It, 10 HBLR 207

(2020) [hereinafter Elhauge, How Horizontal Shareholding Harms]. Elhauge also offers a detailed review of various recent

The Antitrust Bulletin

2021, Vol. 66(1) 12–38

ªThe Author(s) 2021

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DOI: 10.1177/0003603X20985804

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Key issues I flagged in my last review for consideration by future research, and that continue to be

relevant, include:

(1) documentation of observed and formal investigation of theoretically plausible governance

mechanisms by which common ownership can cause changes in competitive outcomes,

(2) investigations as to whether there are measurable common ownership effects on firm behavior

and market outcomes in different industries and geographies,

(3) development of alternative estimation techniques, including structural methods, alternative

measures of common ownership, and identification strategies,

(4) focus on firm behavior and product market outcomes rather than broad “industry” studies, and

(5) a focus on (ownership) data quality and the need for regulators to make available high-quality

ownership data to enable researchers to study this important topic.

The rationale was as follows: first, a better understanding of mechanism and theory as well as

measurement and estimation techniques help increase confidence in the causal interpretation of

empirical results, the extrapolation of existing results, quantitative measurement of effects, and help

inform policy makers about the likely effects of implementing various policy proposals. Second, a

formal study of mechanisms is necessary because the existing corporate governance literature does not

take equilibrium effects from strategic interacti ons between firms into account, which has led to

logically wrong conclusions in the literature. Third, testing the theory in different industries and on

different outcomes would help inform policy makers whether targeted industry-specific interventions

or broad-based structural reforms are more appropriate policy responses. Lastly, a focus on product

market outcomes as opposed to broad industry studies and on high-quality ownership data is necessary

to avoid false negatives that can arise from an attenuation bias due to mismeasured common ownership

and less meaningful market definitions.

4

This article reviews the many important papers that have pushed the boundaries of knowledge

forward in each of these five areas. Whereas the vast majority of the review details such positive

progress, I will also critically discuss some prominent papers that have not paid attention to data

quality and theoretical foundations and thus have come to conclusions that lack substantiation. That

part includes a discussion of withdrawals of earlier claims by two sets of authors that had criticized the

literature on anticompetitive effects and that are often mentioned in the policy debate. I also discuss a

new structural paper that proves that Azar, Schmalz, and Tecu’s (AST) results are not due to their use

of reduced-form methods that may be affected by endogenous market shares. These earlier claims

criticizing the literature had been widely distributed in the profession and have influenced the policy

debate—but have turned out to be based on the selection of small subsamples of the data as well as data

errors, which in two cases even involved replacing actual data with zeros.

This review is selective in that it does not cover significant new work in other parts of the literature

and in particular important theoretical work on the macroeconomic consequences of common

papers in the economics literature, which no interested reader should miss. Id. at 209–55; Einer Elhauge, The Causal

Mechanisms of Horizont al Shareholding,82O

HIO ST. L.J. (forthcoming 2021), http s://ssrn.com/abstr act¼3370675 or

http://dx.doi.org/10.2139/ssrn.3370675. MATTHEW BACKUS ETAL., THE COMMON OWNERSHIP HYPOTHESIS:THEORY AND

EVIDENCE, The Brookings Institution (2019), https://www.brookings.edu/wp-content/uploads/2019/02/ES_20190205_

Common-Ownership.pdf a lso offer a review, which howe ver takes the narrower per spective of the modern indus trial

organization (IO) literature with its valid, but selective, methodological preferences and concerns.

4. For a detailed explanation of the problems with two prominent studies that have tried to disprove anticompetitive effects from

horizontal sharehol ding using industry defin itions that are vastly larger than actual market definitions and thus treat

shareholders as horizontal when they are not, see Elhauge, How Horizontal Shareholding Harms,supra note 3, at 244–

54. See also the methodological critique in this issue by Jos´e Azar et al., Research on the Competitive Consequences of

Common Ownership: A Methodological Critique,66A

NTITRUST BULL. 113 (2021).

Schmalz 13