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Endogenous Choice of Stakes Under Common Ownership

Scott Hemphill, Marcel Khan

In this paper, we endogenize the ownership choices of concentrated owners. Concentrated owners choose their stakes in light of the effects of ownership on firm behavior and firm (and competitor) profits. We analyze these choices within a simple model of competition in a duopoly where the two competing firms are owned by a mix of NCOs, CCOs, and atomized owners.

We present a simple model of common ownership in which an investor chooses its stake in competing firms in light of the effects on firm behavior and firm profits. Two firms compete in Cournot duopoly, and ownership affects a firm’s objective function in the manner posited by Bresnahan & Salop (1986) and Salop & O’Brien (2000). We show that an investor with equal stakes in both firms—a so-called com- mon concentrated owner (CCO)—places a greater value on an additional share of a firm, compared to atomistic owners. The same is true of a noncommon concentrated owner (NCO) with a stake in just one firm. Both the CCO and the NCOs thus have incentives to acquire any shares held by atomistic owners. Our model yields two testable empirical predictions. First, equilibrium ownership structure in noncom- petitive industries should be systematically more concentrated than in competitive industries. Second, within the investment portfolio of institutional investors, holdings in noncompetitive industries should be systematically more concentrated than holdings in competitive industries.