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The Common Ownership Hypothesis

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The Common Ownership Hypothesis

Theory and Evidence

Brookings Institution,

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The “common ownership hypothesis” has potentially enormous ramifications for business competition.

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Public company executives obey a fundamental rule in business: Compete to gain market share, grow profits and increase shareholder returns. Professors Matthew Backus, Christopher Conlon and Michael Sinkinson examine this principle in the context of the “common ownership hypothesis,” which posits a disincentive to compete and inverts traditional thinking about profit maximization. Investors and business leaders can explore a fascinating dynamic – with enormous consequences for consumers and market participants – in this powerful report.

Summary

Publicly traded enterprises compete and innovate to garner market share and drive maximum profitability for their shareholders. The upshot? Consumers and businesses win, as prices decline and the quality of goods and services improve. But some economists offer a counter supposition: the “common ownership hypothesis” (COH). This theory suggests that, because of the massive institutional ownership of industry competitors, corporate executives may look to deliver shareholder returns by also working to enhance their peers’ profitability. Some researchers ...

About the Authors

Matthew Backus, Christopher Conlon and Michael Sinkinson are assistant professors of economics at Columbia, New York University and Yale, respectively.

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