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.
Read the full post at MarketWatch.
Nemit Shroff is the Class of 1958 Career Development Professor and an Associate Professor of Accounting at the MIT Sloan School of Management.