By Maria Bas1, Lilas Demmou, Guido Franco and Javier Garcia-Bernardo2
The increase in institutional ownership, accompanied by the shift towards passive portfolio management and the rise of common ownership, have transformed OECD countries financial markets in the last decades. These transformations have the potential to influence listed firms’ productivity, given the role of equity owners in allocating private savings across firms and influencing firms’ investment decisions.
Against this backdrop, and relying on a rich firm-level dataset covering financial and granular ownership information on firms across a wide range of countries and sectors, Bas et al. (2023) study the productivity consequences of these changes via two main channels: a “governance channel”, looking at the role of institutional owners’ business model (i.e., investment style, time horizon etc.); and a “common ownership” channel, analysing the productivity impact of simultaneous ownership of shares in competing firms (i.e. intra-industry) or potentially vertically integrated firms (i.e. inter-industry).
The governance channel
The business model of institutional owners has recently been the subject of debate in two main areas. First, institutional investors tend to have higher portfolio turnover rates than corporate owners, potentially inducing a focus on short-term outcomes, while long-term-oriented owners are more likely to support innovative and human capital-intensive projects that yield (productivity) benefits over time. Second, institutional investors increasingly rely on passive investment styles, characterized by reduced monitoring but also increased diversification, which can encourage support for R&D activities by attenuating idiosyncratic risks associated with innovation.
Our main findings suggest, overall, a positive relationship through the governance channel: firms displaying higher institutional ownership tend to have higher productivity levels and growth rates compared to their peers (Figure 1). Consistent with theory, there is some heterogeneity across different types of institutional investors depending on their time horizon and investment style. On the one hand, the positive correlation tends to vanish when institutional investors’ horizon shortens, highlighting the relevance of the provision of patient capital (Figure 1). On the other hand, the correlation appears larger the higher the shares of large, passive and diversified owners, confirming that a diversified portfolio may favour support to innovative investments despite potential lower monitoring.
Figure 1 Institutional ownership and productivity are positively related at the firm-level
Note: Interpreting results as if they were causal, the blue bars represent the average change in firms’ productivity following a 5 p.p. increase in institutional ownership. The orange whiskers indicate the 95% confidence intervals. Source: Bas, Demmou, Franco and Garcia-Bernardo (2023).
The common ownership channel
The consequences of common ownership for firms’ productivity may vary depending on whether it occurs within industries or across industries.
Intra-industry common ownership. Firms operating in the same industry and belonging to the same investor’s portfolio may, in the interest of their common shareholders, compete less intensively on product markets, for instance by colluding more easily, with detrimental consequences for productivity (competition channel). At the same time, intra-industry common ownership could benefit innovation and productivity when inter-firm coordination is explicit (e.g. joint ventures or strategic alliances) and firms find it easier to cooperate in their R&D efforts and share knowledge (cooperation channel). The estimates from the analysis linking intra-sector common ownership and productivity are not always significant (Figure 2, left panel). Still a negative relationship appears to prevail when they are, hinting that the competition channel may slightly outweigh the cooperation channel. The negative association is stronger in innovative sectors, further corroborating the potential existence of a competition channel given that these industries tend to be more concentrated.
Inter-industry common ownership. Common ownership along the value chain may lead to stronger business relationships among vertically integrated firms, (vertical integration / spillover channel), by attenuating hold-up problems when information asymmetries are high. Moreover, from a general equilibrium perspective, the attempt to increase profits through higher prices and lower competition is not immune to a backlash for common owners, as they risk ending up with lower profits in downstream industries due to higher inputs costs. The empirical investigation supports the existence of a positive relationship between inter-industry common ownership and firm-level productivity (Figure 2, right panel). The positive association is again stronger for firms producing in innovative sectors, potentially due to a more efficient network of vertical relationships and technological spillovers, which are particularly relevant in these sectors.
Figure 2 The productivity implications of common ownership depend on whether it occurs intra- or inter-industry
Note: Interpreting results as if they were causal, the blue bars represent the average change in firms’ productivity following an increase in inter (left panel) or intra (right panel) industry common ownership from 0 to the level observed at the 75th percentile of the distribution of the respective firm level common ownership measure. The orange whiskers indicate the 95% confidence intervals. Common ownership is measured as in Azar et al. (2018) and Azar et al. (2021). Source: Bas, Demmou, Franco and Garcia-Bernardo (2023).
References
Azar, J., M. C. Schmalz and I. Tecu, (2018), “Anticompetitive effects of common ownership”, The Journal of Finance, Vol. 73(4): 1513–1565. https://doi.org/10.1111/jofi.12698.
Azar, J., and X. Vives, (2021), “Revisiting the anticompetitive effects of common ownership”, IESE Business School Working Paper. https://dx.doi.org/10.2139/ssrn.3805047.
Bas, M., Demmou, L., Franco, G., Garcia-Bernardo, J. (2023), “Institutional shareholding, common ownership and productivity: A cross-country analysis”, OECD Economics Department Working Paper No 1767, https://doi.org/10.1787/d398e5b4-en.