Endogenous Choice of Stakes Under Common Ownership

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 common 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 noncompetitive 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.