These markets are so efficient that businesses worldwide come to the American markets to raise capital.
But that model, which supports an eco-system of start-ups, job creation, and retirement security for millions of Americans, may be in danger from economic interventionists who support a misguided hypothesis known as “common ownership.” The common ownership hypothesis claims that institutional investors holding a minority percentage of stock in multiple companies in the same sector of the economy reduce competition and raise prices. The proponents of the common ownership hypothesis are wrong regarding the effects of common ownership upon the economy. Furthermore, the policy changes proposed by these activists would harm entrepreneurship and damage U.S. economic competitiveness.
An institutional investor is a large organization, such as an investment firm, mutual fund, pension fund, or insurance company, that makes substantial investments in the stock market and elsewhere on behalf of its investors who are the asset owners. An institutional investor can invest money into multiple companies in the same market—referred to as common ownership or non-controlling interest in competing companies. For instance, an index fund that tracks the entire U.S. stock market might invest in multiple airlines or banks on behalf of its investors. For decades, investment funds have held stock in numerous companies, some in the same sector, to balance their portfolios, spread the benefits of their expertise across economic sectors, and give individual investors the benefits of professionally managed, diversified portfolios.
The academics and policymakers who support the common ownership hypothesis often point to two academic studies that claimed to find a correlation between a noncontrolling interest in competing companies and higher prices in the airline and banking industries. Numerous subsequent studies, however, have examined and contradicted those findings, casting doubt on the theory that overlapping ownership alone is enough to affect companies’ competitive behavior. Nevertheless, advocates who seek to limit institutional investors from investing in multiple companies in the same market rely on flawed studies lacking empirical evidence to promote aggressive policy ideas that would reshape institutional investing with severe consequences for individual investors and capital markets.
In the past, multiple-party coalitions in the United States and European Union have dismissed the common ownership hypothesis. However, new threats of antitrust actions may put this hypothesis on the radar in ways that were unthinkable just a few years ago. The negative consequences of any limitations on investments are cause for serious concern, including a restriction on capital and reduction in investment in startups and small companies, thereby hobbling future economic growth. In addition, investors such as the 50% of American families who invest in mutual funds or save for retirement through 401(k) plans would be made worse off through increased fees and increased risk by the undercutting of diversification of asset portfolios.
This white paper discusses the benefits of allowing common ownership of companies in the same industry; analyzes academic literature to show that common owners do not impair competition; and explains how restricting the investments of institutional investors would harm capital markets, companies, investors, and consumers.
In particular, the assessment of academic literature results in the following key findings:
- There is virtually no empirical evidence that common owners harm competition.
- The most recent studies on the topic have found no correlation between common owners and higher prices.
- There is a lack of evidence indicating that institutional investors try to limit competition; there is also no evidence that they could even if so inclined.
Accordingly, most scholars and senior government officials have concluded that policymakers should not change the regulatory framework governing institutional investments and that to do otherwise could seriously damage capital markets and harm individual investors
Download the full report below.
