Research Insights: Benefits of a Seeming Monopoly

Common institutional ownership, when an institutional investor holds significant equity stakes in multiple firms within the same industry, has become an increasingly prevalent phenomenon. For example, the proportion of U.S. public companies with common ownership has increased from less than 10% in 1980 to more than 60% in recent years. 

Regulators in the European Union and the U.S. have begun to scrutinize this trend. The Federal Trade Commission (FTC) Commissioner, Noah Phillips, comments that “Some concerned with common ownership have proposed remedies that are quite dramatic. … I find the common ownership particularly interesting because it takes place at the intersection of antitrust, corporate, and securities law and policy.” This phenomenon has become the subject of much study, which has largely focused on the negative consequences, for example, collusion resulting in anticompetitive effects. However, might there be beneficial capital market consequences of common ownership? 

Hao Zhang, Professor in the Saunders College Department of Finance and Accounting, recently completed a study of the effect of common institutional ownership on an important capital market outcome—stock price crash risk. He co-authored an article, “Common institutional ownership and stock price crash risk,” published in Contemporary Accounting Research.

To test their hypothesis—stated in the null form, that common institutional ownership is unrelated to stock price crash risk—Zhang and his co-authors analyze a sample of US firms with common stocks listed on the NYSE, NASDAQ, and AMEX in 1980–2017.  Their final sample consists of 96,119 firm-year observations. 

Their findings suggest that common ownership is associated with an economically significant reduction in stock price crash risk. Common ownership reduces crash risk by promoting accounting conservatism and constraining corporate overinvestment behaviors. They also provide additional evidence that common institutional owners reduce crash risk because they have an information advantage and monitoring incentives to constrain the focal firm’s bad news hoarding.

These findings could be useful for investors in assessing investment risk and designing portfolios with reduced crash risk. The findings also have policy implications for regulators and contribute to the recent policy debate by cautioning against regulatory proposals that may undermine the valuable corporate governance role of institutional investors. 

View paper in Contemporary Accounting Research (2024), Common institutional ownership and stock price crash risk.