Common Owners as Active Monitors: A Theory of Rational Neglect

Rötzer, Sebastian (2022): Common Owners as Active Monitors: A Theory of Rational Neglect.

Abstract

I propose a novel mechanism of how common ownership affects product market competition. Internalization of shareholders' portfolio interests into managers' objective functions is no longer necessary if owners can provide active monitoring that affects firms' ability to compete. Whenever product market externalities cause common owners to neglect monitoring, firms are less competitive compared to a counterfactual where shareholder interests are aligned with firm value maximization. I formally prove this intuition in a static model of active monitoring with common ownership that allows for heterogeneous firms and portfolio allocations. Based on the game's unique Nash equilibrium, I derive empirical predictions that link unobserved active monitoring to observed product market outcomes. I conclude with a brief analysis of two policy interventions aimed at curbing the anti-competitive effects of common ownership.

• Item Type: MPRA Paper
• Language: English
• Keywords: Common ownership, corporate governance, industrial organization, product markets
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers ; Acquisitions ; Restructuring ; Corporate Governance; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets

References

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@article{cornes_2012_FullyAggregativeGames, title = {Fully Aggregative Games}, author = {Cornes, Richard and Hartley, Roger}, year = {2012}, journal = {Economics Letters}, volume = {116}, number = {3}, pages = {631--633}, issn = {0165-1765}, doi = {10.1016/j.econlet.2012.06.024}, abstract = {A game is fully aggregative if payoffs and marginal payoffs depend only on a player's own strategy and a function of the strategy profile which is common to all players. We characterize the form which this function must take in such a game and show that the game will be strategically equivalent to another game in which the function is the simple sum of strategies.}, keywords = {Additive separability,Aggregative games,Noncooperative game theory} }

@article{cronqvist_2009_LargeShareholdersCorporate, title = {Large {{Shareholders}} and {{Corporate Policies}}}, author = {Cronqvist, Henrik and Fahlenbrach, R{\"u}diger}, year = {2009}, journal = {The Review of Financial Studies}, volume = {22}, number = {10}, pages = {3941--3976}, publisher = {{Oxford Academic}}, issn = {0893-9454}, doi = {10.1093/rfs/hhn093}, abstract = {Abstract. We analyze the effects of heterogeneity across large shareholders, using a new blockholder-firm panel dataset in which we can track all unique blockho}, langid = {english} }

@article{dahlquist_2017_AsymmetriesPortfolioChoice, title = {Asymmetries and {{Portfolio Choice}}}, author = {Dahlquist, Magnus and Farago, Adam and T{\'e}dongap, Rom{\'e}o}, year = {2017}, journal = {The Review of Financial Studies}, volume = {30}, number = {2}, pages = {667--702}, issn = {0893-9454}, doi = {10.1093/rfs/hhw091}, abstract = {We examine the portfolio choice of an investor with generalized disappointment-aversion preferences who faces log returns described by a normal-exponential model. We derive a three-fund separation strategy: the investor allocates wealth to a risk-free asset, a standard mean-variance efficient fund, and an additional fund reflecting return asymmetries. The optimal portfolio is characterized by the investor's endogenous effective risk aversion and implicit asymmetry aversion. In empirical applications, we find that disappointment aversion is associated with much larger asymmetry aversion than are standard preferences. Our model explains patterns in popular portfolio advice across both risk appetites and investment horizons.Received November 12, 2015; editorial decision July 20, 2016 by Editor Stefan Nagel.}, keywords = {Relevant} }

@article{deangelo_1981_CompetitionUnanimity, title = {Competition and {{Unanimity}}}, author = {DeAngelo, Harry}, year = {1981}, journal = {The American Economic Review}, volume = {71}, number = {1}, pages = {18--27}, issn = {0002-8282} }

@article{dejong_2007_LogsumEvaluationMeasure, title = {The Logsum as an Evaluation Measure: {{Review}} of the Literature and New Results}, shorttitle = {The Logsum as an Evaluation Measure}, author = {{de Jong}, Gerard and Daly, Andrew and Pieters, Marits and {van der Hoorn}, Toon}, year = {2007}, journal = {Transportation Research Part A: Policy and Practice}, series = {Selected {{Papers}} on {{Applications}} of {{Discrete Choice Models Presented}} at the {{European Regional Science Conference}}, {{Amsterdam}}, {{August}} 2005}, volume = {41}, number = {9}, pages = {874--889}, issn = {0965-8564}, doi = {10.1016/j.tra.2006.10.002}, abstract = {The logsum is a measure of consumer surplus in the context of logit choice models. In spite of the very frequent use of logit models in transport, project assessment is only rarely done using logsums. Instead in project evaluation or appraisal, changes in transport costs and time (borrowing values of time from some source) are commonly used to get the traveller benefits. The paper contains a review of the theoretical and applied literature on the use of logsums as a measure of consumer surplus change in project appraisal and evaluation. It then goes on to describe a case study with the Dutch National Model System for transport in which the logsum method and the commonly used value of time method are compared for a specific project (high speed trains that would connect the four main cities in the Randstad: Amsterdam, The Hague, Rotterdam and Utrecht).}, keywords = {Consumer surplus,Discrete choice models,Logsum,Project assessment,Relevant} }

@techreport{dennis_2021_CommonOwnershipDoes, type = {{{SSRN Scholarly Paper}}}, title = {Common {{Ownership Does Not Have Anti-Competitive Effects}} in the {{Airline Industry}}}, author = {Dennis, Patrick J. and Gerardi, Kristopher and Schenone, Carola}, year = {2021}, number = {ID 3063465}, address = {{Rochester, NY}}, institution = {{Social Science Research Network}}, doi = {10.2139/ssrn.3063465}, abstract = {Institutions often own equity in multiple firms that compete in the same product market. These institutional "common owners" may induce or mandate anti-competitive pricing behavior among product market rivals. This paper evaluates prior evidence of such behavior between competing airlines. The measure of common ownership used is a function of each airline's market share, as well as the control and cash flow rights held by the institutions that own the airlines that compete in the same market. We show that the documented positive correlation between common ownership and ticket prices stems from the market share component of the common ownership measure, and not the ownership and control components. We examine other econometric and data measurement issues and show that the previously documented results are sensitive to alternative measures of investor control, as well as alternative assumptions about equity holders' ownership and control during bankruptcy.}, langid = {english}, keywords = {Airlines,Common Owners,Competition} }

@article{dhillon_2015_OwnershipStructureVoting, title = {Ownership {{Structure}}, {{Voting}}, and {{Risk}}}, author = {Dhillon, Amrita and Rossetto, Silvia}, year = {2015}, journal = {The Review of Financial Studies}, volume = {28}, number = {2}, pages = {521--560}, issn = {0893-9454}, doi = {10.1093/rfs/hhu071}, abstract = {We analyze the determinants of a firm's ownership structure when decisions over risk are taken by majority vote of risk-averse shareholders. We show that when a fraction of small, diversified shareholders abstains from voting, mid-sized blockholders may emerge to mitigate the conflict of interests between one large shareholder, who prefers less risky investments, and these small, non-voting shareholders. The paper offers a novel explanation for the puzzling observation that many firms have multiple blockholders. The paper develops numerous empirical implications, for example on the link between ownership structure and risk choices and on the relative size of blocks.} }

@misc{ederer_2022_WelfareCostCommon, title = {The {{Welfare Cost}} of {{Common Ownership}}}, author = {Ederer, Florian and Pellegrino, Bruno}, year = {2022}, abstract = {We study the welfare implications of the rise of common ownership and product market concentration in the United States from 1994 to 2018. We develop a general equilibrium model of oligopoly in which firms are connected through a large network that reflects ownership overlap as well as product similarity. In our model, common ownership of competing firms induces unilateral incentives to soften product market competition. We estimate our model for the universe of public corporations in the U.S. using a combination of firm financials, investor holdings and text-based product similarity data. We perform counterfactual calculations that allow us to evaluate how the efficiency and the distributional impact of common ownership have evolved over this period. Based on our model, the welfare cost of common ownership, measured as deadweight loss-to-total surplus ratio, has increased nearly tenfold (from 0.3\% to over 4\%) between 1994 and 2018. The rise of common ownership has also resulted in a significant reallocation of surplus from consumers to producers.}, langid = {english}, keywords = {Read} }

@article{edmans_2011_GovernanceTradingIntervention, title = {Governance {{Through Trading}} and {{Intervention}}: {{A Theory}} of {{Multiple Blockholders}}}, shorttitle = {Governance {{Through Trading}} and {{Intervention}}}, author = {Edmans, Alex and Manso, Gustavo}, year = {2011}, journal = {The Review of Financial Studies}, volume = {24}, number = {7}, pages = {2395--2428}, issn = {0893-9454}, doi = {10.1093/rfs/hhq145}, abstract = {Traditional theories argue that governance is strongest under a single large blockholder, as she has high incentives to undertake value-enhancing interventions. However, most firms are held by multiple small blockholders. This article shows that, while such a structure generates free-rider problems that hinder intervention, the same coordination difficulties strengthen a second governance mechanism: disciplining the manager through trading. Since multiple blockholders cannot coordinate to limit their orders and maximize combined trading profits, they trade competitively, impounding more information into prices. This strengthens the threat of disciplinary trading, inducing higher managerial effort. The optimal blockholder structure depends on the relative effectiveness of manager and blockholder effort, the complementarities in their outputs, information asymmetry, liquidity, monitoring costs, and the manager's contract.}, keywords = {Relevant} }

@article{edmans_2014_BlockholdersCorporateGovernance, title = {Blockholders and {{Corporate Governance}}}, author = {Edmans, Alex}, year = {2014}, journal = {Annual Review of Financial Economics}, volume = {6}, number = {1}, pages = {23--50}, doi = {10.1146/annurev-financial-110613-034455}, abstract = {This paper reviews the theoretical and empirical literature on the channels through which blockholders (large shareholders) engage in corporate governance. In classical models, blockholders exert governance through direct intervention in a firm's operations, otherwise known as ``voice.'' These theories have motivated empirical research on the determinants and consequences of activism. More recent models show that blockholders can govern through an alternative mechanism known as ``exit''\textemdash selling their shares if the manager underperforms. These theories give rise to new empirical studies on the two-way relationship between blockholders and financial markets, linking corporate finance with asset pricing. Blockholders may also worsen governance by extracting private benefits of control or pursuing objectives other than firm value maximization. I highlight the empirical challenges in identifying causal effects of and on blockholders as well as the typical strategies attempted to achieve identification. I close with directions for future research.}, keywords = {Relevant} }

@article{edmans_2019_GovernanceCommonOwnership, title = {Governance {{Under Common Ownership}}}, author = {Edmans, Alex and Levit, Doron and Reilly, Devin}, year = {2019}, journal = {The Review of Financial Studies}, volume = {32}, number = {7}, pages = {2673--2719}, issn = {0893-9454}, doi = {10.1093/rfs/hhy108}, abstract = {Abstract. Conventional wisdom is that diversification weakens governance by spreading investors too thinly. We show that, when investors own multiple firms (``c}, langid = {english}, keywords = {Relevant} }

@article{elhauge_2016_HorizontalShareholding, title = {Horizontal {{Shareholding}}}, author = {Elhauge, Einer}, year = {2016}, journal = {Harvard Law Review}, volume = {129}, pages = {51}, langid = {english} }

@article{faure-grimaud_2004_PublicTradingPrivate, title = {Public {{Trading}} and {{Private Incentives}}}, author = {{Faure-Grimaud}, Antoine and Gromb, Denis}, year = {2004}, journal = {The Review of Financial Studies}, volume = {17}, number = {4}, pages = {985--1014}, issn = {0893-9454}, doi = {10.1093/rfs/hhh002}, abstract = {This article studies the link between public trading and the activity of a firm's large shareholder who can affect firm value. Public trading results in the formation of a stock price that is informative about the large shareholder's activity. This increases the latter's incentives to engage in value-increasing activities. Indeed, if he has to liquidate part of his stake before the effect of his activity is publicly observed, a more informative price rewards him for his activity. Implications are derived for the decision to go public, capital structure, and security design.} }

@book{fisher_1930_TheoryInterest, title = {The {{Theory}} of {{Interest}}}, author = {Fisher, Irving}, year = {1930}, publisher = {{The MacMillan Company}} }

@article{fos_2017_DisciplinaryEffectsProxy, title = {The {{Disciplinary Effects}} of {{Proxy Contests}}}, author = {Fos, Vyacheslav}, year = {2017}, journal = {Management Science}, volume = {63}, number = {3}, pages = {655--671}, publisher = {{INFORMS}}, issn = {0025-1909}, doi = {10.1287/mnsc.2015.2340}, abstract = {Using a manually collected data set of all proxy contests from 1994 through 2012, I show that proxy contests play an important role in hostile corporate governance. Target shareholders benefit from proxy contests: the average abnormal returns reach 6.5\% around proxy contest announcements. Proxy contests that address firms' business strategies and undervaluation are most beneficial for shareholders. By contrast, proxy contests that aim at changing capital structure and governance do not lead to higher firm values. Relative to matching firms, future targets are smaller, they have higher stock liquidity, higher institutional and activist ownership, lower leverage and market valuation, and higher investments. Whereas most of these characteristics predict proxy contests in time series, prior to proxy contests, targets also experience poor stock performance, decreases in investments, increases in cash reserves and payouts to shareholders, and increases in management's entrenchment. These changes in corporate policies are consistent with targets' attempts to affect the probability of a proxy contest. This paper was accepted by Amit Seru, finance.}, keywords = {corporate governance,financial institutions,proxy contests,Read} }

@article{franke_2011_EstimationStructuralStochastic, title = {Estimation of a {{Structural Stochastic Volatility Model}} of {{Asset Pricing}}}, author = {Franke, Reiner and Westerhoff, Frank}, year = {2011}, journal = {Computational Economics}, volume = {38}, number = {1}, pages = {53--83}, issn = {1572-9974}, doi = {10.1007/s10614-010-9238-7}, abstract = {The paper estimates an elementary agent-based financial market model recently put forward by the same authors. Invoking the two trader types of fundamentalists and chartists, it comprises four features: price determination by excess demand; a herding mechanism that gives rise to a macroscopic adjustment equation for the population shares of the two groups; a rush towards fundamentalism when the price misalignment becomes too large; and, finally, differently strong noise components in the demand per chartist and fundamentalist trader, which implies a structural stochastic volatility in the returns. The estimation is performed using the method of simulated moments. Combining it with bootstrap and Monte Carlo methods, it is found that the model cannot be rejected by the empirical daily returns from a stock market index and a foreign exchange rate. Measures of the matching of the single moments are satisfactory, too, while the behavioural parameters are well identified and are able to discriminate between the two markets.}, langid = {english} }

@article{franke_2012_StructuralStochasticVolatility, title = {Structural Stochastic Volatility in Asset Pricing Dynamics: {{Estimation}} and Model Contest}, shorttitle = {Structural Stochastic Volatility in Asset Pricing Dynamics}, author = {Franke, Reiner and Westerhoff, Frank}, year = {2012}, journal = {Journal of Economic Dynamics and Control}, series = {Quantifying and {{Understanding Dysfunctions}} in {{Financial Markets}}}, volume = {36}, number = {8}, pages = {1193--1211}, issn = {0165-1889}, doi = {10.1016/j.jedc.2011.10.004}, abstract = {In the framework of small-scale agent-based financial market models, the paper starts out from the concept of structural stochastic volatility, which derives from different noise levels in the demand of fundamentalists and chartists and the time-varying market shares of the two groups. It advances several different specifications of the endogenous switching between the trading strategies and then estimates these models by the method of simulated moments (MSMs), where the choice of the moments reflects the basic stylized facts of the daily returns of a stock market index. In addition to the standard version of MSM with a quadratic loss function, we also take into account how often a great number of Monte Carlo simulation runs happen to yield moments that are all contained within their empirical confidence intervals. The model contest along these lines reveals a strong role for a (tamed) herding component. The quantitative performance of the winner model is so good that it may provide a standard for future research.}, langid = {english}, keywords = {Discrete choice approach,Herding,Method of simulated moments,Moment coverage ratio,Transition probability approach} }

@article{franke_2016_WhySimpleHerding, title = {Why a Simple Herding Model May Generate the Stylized Facts of Daily Returns: Explanation and Estimation}, shorttitle = {Why a Simple Herding Model May Generate the Stylized Facts of Daily Returns}, author = {Franke, Reiner and Westerhoff, Frank}, year = {2016}, journal = {Journal of Economic Interaction and Coordination}, volume = {11}, number = {1}, pages = {1--34}, issn = {1860-7128}, doi = {10.1007/s11403-014-0140-6}, abstract = {The paper proposes an elementary agent-based asset pricing model that, invoking the two trader types of fundamentalists and chartists, comprises four features: (i) price determination by excess demand; (ii) a herding mechanism that gives rise to a macroscopic adjustment equation for the market fractions of the two groups; (iii) a rush towards fundamentalism when the price misalignment becomes too large; and (iv) a stronger noise component in the demand per chartist trader than in the demand per fundamentalist trader, which implies a structural stochastic volatility in the returns. Combining analytical and numerical methods, the interaction between these elements is studied in the phase plane of the price and a majority index. In addition, the model is estimated by the method of simulated moments, where the choice of the moments reflects the basic stylized facts of the daily returns of a stock market index. A (parametric) bootstrap procedure serves to set up an econometric test to evaluate the model's goodness-of-fit, which proves to be highly satisfactory. The bootstrap also makes sure that the estimated structural parameters are well identified.}, langid = {english} }

@article{fresard_2010_FinancialStrengthProduct, title = {Financial {{Strength}} and {{Product Market Behavior}}: {{The Real Effects}} of {{Corporate Cash Holdings}}}, shorttitle = {Financial {{Strength}} and {{Product Market Behavior}}}, author = {Fr{\'e}sard, Laurent}, year = {2010}, journal = {The Journal of Finance}, volume = {65}, number = {3}, pages = {1097--1122}, publisher = {{[American Finance Association, Wiley]}}, issn = {0022-1082}, abstract = {This paper shows that large cash reserves lead to systematic future market share gains at the expense of industry rivals. Using shifts in import tariffs to identify exogenous intensification of competition, difference-in-difference estimations support the causal impact of cash on product market performance. Moreover, the analysis reveals that the "competitive" effect of cash is markedly distinct from the strategic effect of debt on product market outcomes. This effect is stronger when rivals face tighter financing constraints and when the number of interactions between competitors is large. Overall, the results suggest that cash policy encompasses a substantial strategic dimension.} }

@article{fresard_2016_HowDoesCorporate, title = {How {{Does Corporate Investment Respond}} to {{Increased Entry Threat}}?}, author = {Fr{\'e}sard, Laurent and Valta, Philip}, year = {2016}, journal = {The Review of Corporate Finance Studies}, volume = {5}, number = {1}, pages = {1--35}, issn = {2046-9128}, doi = {10.1093/rcfs/cfv015}, abstract = {We study how product-market interactions affect investment. We use reductions of import tariffs to examine how incumbents modify investment when the threat of rivals' entry intensifies. Incumbents reduce investment by 7.2\% in response to higher entry threat. Consistent with a strategic behavior, the investment reduction varies across market structures: it concentrates in markets in which competitive actions are strategic substitutes, where deterring entry is costly and investment makes incumbents look soft. Our results provide novel evidence on how and why firms' interactions influence corporate investment.Received August 10, 2015; accepted December 1, 2015 by Editor Efraim Benmelech.} }

@article{gilje_2020_WhoPayingAttention, title = {Who's Paying Attention? {{Measuring}} Common Ownership and Its Impact on Managerial Incentives}, shorttitle = {Who's Paying Attention?}, author = {Gilje, Erik P. and Gormley, Todd A. and Levit, Doron}, year = {2020}, journal = {Journal of Financial Economics}, volume = {137}, number = {1}, pages = {152--178}, issn = {0304-405X}, doi = {10.1016/j.jfineco.2019.12.006}, abstract = {We derive a measure that captures the extent to which common ownership shifts managers' incentives to internalize externalities. A key feature of the measure is that it allows for the possibility that not all investors are attentive to whether a manager's actions benefit the investor's overall portfolio. Empirically, we show that potential drivers of common ownership, including mergers in the asset management industry and, under certain circumstances, even indexing, could diminish managerial motives to internalize externalities. Our findings illustrate the importance of accounting for investor inattention when analyzing whether the growth of common ownership affects managerial incentives.}, langid = {english}, keywords = {Common investors,Indexing,Institutional ownership,Managerial incentives} }

@article{giroud_2010_DoesCorporateGovernance, title = {Does Corporate Governance Matter in Competitive Industries?}, author = {Giroud, Xavier and Mueller, Holger M.}, year = {2010}, journal = {Journal of Financial Economics}, volume = {95}, number = {3}, pages = {312--331}, issn = {0304-405X}, doi = {10.1016/j.jfineco.2009.10.008}, abstract = {By reducing the threat of a hostile takeover, business combination (BC) laws weaken corporate governance and increase the opportunity for managerial slack. Consistent with the notion that competition mitigates managerial slack, we find that while firms in non-competitive industries experience a significant drop in operating performance after the laws' passage, firms in competitive industries experience no significant effect. When we examine which agency problem competition mitigates, we find evidence in support of a ``quiet-life'' hypothesis. Input costs, wages, and overhead costs all increase after the laws' passage, and only so in non-competitive industries. Similarly, when we conduct event studies around the dates of the first newspaper reports about the BC laws, we find that while firms in non-competitive industries experience a significant stock price decline, firms in competitive industries experience a small and insignificant stock price impact.}, langid = {english}, keywords = {Anti-takeover legislation,Corporate governance,Product market competition} }

@book{greene_2014_EconometricAnalysisInternational, title = {Econometric {{Analysis}}: {{International Edition}}: {{Global Edition}}}, shorttitle = {Econometric {{Analysis}}}, author = {Greene, William H.}, year = {2014}, edition = {Seventh}, publisher = {{Pearson Education Limited}}, abstract = {For first-year graduate courses in Econometrics for Social Scientists.This title is a Pearson Global Edition.~ The Editorial team at Pearson has worked closely with educators around the world to include content which is especially relevant to students outside the United States.This text serves as a bridge between an introduction to the field of econometrics and the professional literature for graduate students in the social sciences, focusing on applied econometrics and theoretical concepts.}, googlebooks = {fwWpBwAAQBAJ}, isbn = {978-1-292-01400-5}, langid = {english}, keywords = {Business \& Economics / Econometrics} }

@book{guillemin_1974_DifferentialTopology, title = {Differential {{Topology}}}, author = {Guillemin, Victor W. and Pollack, Alan}, year = {1974}, publisher = {{Prentice-Hall}}, abstract = {"This book is written for mathematics students who have had one year of analysis and one semester of linear algebra. Included in the analysis background should be familiarity with basic topological concepts in Euclidean space: openness, connectedness, compactness, etc. We borrow two theorems from analysis which some readers may not have studied: the inverse function theorem, which is used throughout the text; and the change of variable formula for multiple integration, which is needed only for Chapter 4"--Page xiii.}, googlebooks = {CmbwAAAAMAAJ}, isbn = {978-0-13-212605-2}, langid = {english}, keywords = {Mathematics / Topology} }

@article{hansen_1996_ExternalitiesCorporateObjectives, title = {Externalities and {{Corporate Objectives}} in a {{World}} with {{Diversified Shareholder}}/{{Consumers}}}, author = {Hansen, Robert G. and Lott, John R.}, year = {1996}, journal = {The Journal of Financial and Quantitative Analysis}, volume = {31}, number = {1}, pages = {43--68}, issn = {0022-1090}, doi = {10.2307/2331386}, abstract = {If shareholders own diversified portfolios, and if companies impose externalities on one another, shareholders do not want value maximization to be corporate policy. Instead, shareholders want companies to maximize portfolio values. This occurs when firms internalize between-firm externalities. Any kind of externality, pecuniary or nonpecuniary, vertical or horizontal, suffices. What matters is simply that one company's actions affect another's value. Thus, besides the traditional benefit of risk reduction, portfolio diversification offers additional benefits to shareholders through helping internalize externalities. This paper documents the extent of diversification and cross-ownership of stocks among companies where these externalities are likely to be large and provides a capital market test of how merger offers vary with the extent of cross-ownership.}, keywords = {Relevant} }

@article{harford_2011_InstitutionalCrossholdingsTheir, title = {Institutional Cross-Holdings and Their Effect on Acquisition Decisions}, author = {Harford, Jarrad and Jenter, Dirk and Li, Kai}, year = {2011}, journal = {Journal of Financial Economics}, volume = {99}, number = {1}, pages = {27--39}, issn = {0304-405X}, doi = {10.1016/j.jfineco.2010.08.008}, abstract = {Cross-holdings are created when a shareholder of one firm holds shares in other firms as well, and cross-holdings alter shareholder preferences over corporate decisions that affect those other firms. Prior evidence suggests that such cross-holdings explain the puzzle of why shareholders allow acquisitions that reduce the value of the bidder. Conducting a shareholder-level analysis of cross-holdings, we instead find that cross-holdings are too small to matter in most acquisitions and that bidders do not bid more aggressively even in the few cases in which cross-holdings are large. We conclude that cross-holdings do not explain value-reducing acquisitions. Beyond acquisitions, we find that institutional cross-holdings between large firms have, in fact, increased rapidly over the last 20 years, but mostly due to indexing and quasi-indexing. As in acquisitions, cross-holdings by active investors are typically too small to matter.}, langid = {english}, keywords = {Cross-holdings,Institutional investors,Mergers and acquisitions,Shareholder preferences,Value-reducing acquisitions} }

@article{he_2017_ProductMarketCompetition, title = {Product {{Market Competition}} in a {{World}} of {{Cross-Ownership}}: {{Evidence}} from {{Institutional Blockholdings}}}, shorttitle = {Product {{Market Competition}} in a {{World}} of {{Cross-Ownership}}}, author = {He, Jie (Jack) and Huang, Jiekun}, year = {2017}, journal = {The Review of Financial Studies}, volume = {30}, number = {8}, pages = {2674--2718}, issn = {0893-9454}, doi = {10.1093/rfs/hhx028}, abstract = {We analyze the effects of institutional cross-ownership of same-industry firms on product market performance and behavior. Our results show that cross-held firms experience significantly higher market share growth than do non-cross-held firms. We establish causality by relying on a difference-in-differences approach based on the quasi-natural experiment of financial institution mergers. We also find evidence suggesting that institutional cross-ownership facilitates explicit forms of product market collaboration (such as within-industry joint ventures, strategic alliances, or within-industry acquisitions) and improves innovation productivity and operating profitability. Overall, our evidence indicates that cross-ownership by institutional blockholders offers strategic benefits by fostering product market coordination.Received November 12, 2015; editorial decision December 31, 2016 by Editor Itay Goldstein.}, keywords = {Relevant} }

@article{hennessy_2005_DebtDynamics, title = {Debt {{Dynamics}}}, author = {Hennessy, Christopher A. and Whited, Toni M.}, year = {2005}, journal = {The Journal of Finance}, volume = {60}, number = {3}, pages = {1129--1165}, issn = {1540-6261}, doi = {10.1111/j.1540-6261.2005.00758.x}, abstract = {We develop a dynamic trade-off model with endogenous choice of leverage, distributions, and real investment in the presence of a graduated corporate income tax, individual taxes on interest and corporate distributions, financial distress costs, and equity flotation costs. We explain several empirical findings inconsistent with the static trade-off theory. We show there is no target leverage ratio, firms can be savers or heavily levered, leverage is path dependent, leverage is decreasing in lagged liquidity, and leverage varies negatively with an external finance weighted average Q. Using estimates of structural parameters, we find that simulated model moments match data moments.}, langid = {english} }

@article{hennessy_2007_HowCostlyExternal, title = {How {{Costly Is External Financing}}? {{Evidence}} from a {{Structural Estimation}}}, shorttitle = {How {{Costly Is External Financing}}?}, author = {Hennessy, Christopher A. and Whited, Toni M.}, year = {2007}, journal = {The Journal of Finance}, volume = {62}, number = {4}, pages = {1705--1745}, issn = {1540-6261}, doi = {10.1111/j.1540-6261.2007.01255.x}, abstract = {We apply simulated method of moments to a dynamic model to infe