Over the past three decades, there has been tremendous change in ownership of publicly traded firms in the U.S. Consolidation in the asset management industry and the rise in mutual fund investing have led to a small number of institutional investors becoming the largest shareholders of most listed firms. Today, just shy of 70% of U.S. public firms are commonly owned. According to Compustat, Black Rock and Vanguard Group are among the largest five shareholders of more than 53% of the firms in its database.
Given this significant shift toward common ownership, it’s important to understand the consequences on a company’s behavior. Does common ownership impact competition? Does it benefit investors?
Prior literature suggests that common ownership decreases competitive behavior. The theory is that managers of co-owned firms behave in ways to increase the portfolio value of the common owners. It also maintains that disclosure by one firm in an industry is good for everyone, as there are spillover effects related to liquidity and cost of capital for other firms in that industry.
In a recent study, my colleagues and I tested these theories with data. We looked at common ownership’s impact on firms’ disclosure of information such as earnings forecasts and capital expenditures. If common ownership does affect firms’ disclosure decisions, we wanted to know how so and to what extent.
In our study, we looked at firms where one of the investors simultaneously owned a stake larger than 5% in at least two firms in the industry. As all public companies are required to make certain minimum disclosures in the U.S., we looked at any voluntary disclosures above and beyond that minimum. We used three disclosure proxies that are all useful to the market but differ in the degree to which they reveal proprietary information: earnings forecasts, capital expenditure forecasts, and redacted disclosures. We used a sample of 54,541 U.S. public firm observations from 1999 to 2015.
Consistent with existing theory, we find that common ownership is positively associated with the likelihood and frequency of disclosures of earnings and capital expenditure forecasts. To be more specific, our data showed that common ownership increases disclosure of earnings forecasts by 8.8% and disclosure of capital expenditure forecasts by 12.9%. However, common ownership does not generally impact the extent to which firms redact sensitive information from contracts.
We conducted additional tests to shed light on why common ownership increases disclosure. We find that the relationship between common ownership and disclosure is greater when the proportion of the firms in the industry that are commonly owned is higher. This is consistent with greater perceived disclosure benefits as a result of reduced proprietary costs.
Interestingly, we also find that common ownership is associated with fewer redactions when industry-level common ownership is high. This suggests that when the percentage of non-commonly owned firms in an industry reduces, co-owned firms become less worried about competition and are more likely to disclose proprietary information.
In addition, we looked at whether common ownership is associated with an increase in stock liquidity, as large institutional investors — often the common owners — value liquidity due to the size and frequency of their trading. If common ownership leads to an increase in disclosure, then these additional disclosures should result in increased stock liquidity. Our study shows that common ownership is associated with lower bid-ask spread and higher liquidity. Firms with common owners have approximately 2.5% lower spreads and 2.4% higher liquidity compared to firms without common owners.
This means there are significant benefits for investors from common ownership. It helps reduce transaction costs and increases stock liquidity. It also leads to greater transparency about firms’ practices, which provides investors with better insights about the companies in which they have a stake.
Nemit Shroff is a professor at the MIT Sloan School of Management and coauthor of “Disclosure incentives when competing firms have common ownership,” which was accepted for publication at the Journal of Accounting and Economics.
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