Good for shareholders, bad for consumers – the rise of common ownership

Jul. 09, 2017

Does the increase in popularity of index funds mean less competition and higher product prices? Martin C. Schmalz, Assistant Professor at the University of Michigan, believes it does. On 8 June, he visited the Swedish House of Finance to present his work on the subject.

Publicly traded firms are increasingly owned and controlled by a small set of large diversified mutual fund families, leading to a shift in power from individual owners, and from more focused and concentrated owners. As a consequence, more and more companies that are natural competitors are now “commonly owned” by a small set of identical investors. A “common ownership structure” means that controlling shareholders also own competitor’ shares.

“I didn’t think it mattered in the beginning but now I am convinced there is something fundamental going on. Firm behavior depends on ownership structure.”

We can expect less competition in markets with a higher degree of common ownership. This has implications for consumers and also for antitrust regulators who need to take this dynamic into account according to Schmalz. When Martin Schmalz first started researching the topic he focused on the airline industry.

“When BlackRock acquired BGI we could actually see real life effects on prices of flight tickets on certain routes where competing airlines suddenly had the same owners. And this is just one example of how common ownership affects the consumer and ultimately the whole society.”

The second empirical investigation was performed on the US banking market. And, as it turned out, a high bank presence did not mean better deals for the consumers. Instead, what Schmalz and his colleagues found was that – rather than number of banks present – it was changes in the common ownership structure in a region that had an effect on prices. Again, higher levels of common ownership were negative for the consumer.

As more and more researchers are starting to study this dynamic, Schmalz prediction is that the topic is likely to remain on the agenda and become more widely discussed in society.