Two Essays on Institutional Ownership and Product Market Competition

兩篇關於機構投資者股權和產品市場競爭的論文

Student thesis: Doctoral Thesis

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Award date6 May 2022

Abstract

This thesis comprises two essays on how institutional ownership shapes product market competition organized into two chapters. The first studies how industrial firms' bank ownership affects these firms' market power, while the second examines how within-industry common ownership affects firms' advertising strategies.

The first chapter shows that the bank ownership of industrial firms has a causal effect on firms' market power. How banks could shape product market competition has long been debated (Cestone and White (2003); Cetorelli (2004); Cetorelli and Strahan (2006); Saidi and Streitz (2021)).The past thirty years have witnessed an evident increase in the bank ownership of industrial firms in the U.S. market. Instead of focusing on banks' role as creditors, I emphasize the fact that banks act as the equity holders of industrial firms and provide empirical evidence on how bank equity holders could exert influence over the product market competition. I find that bank ownership can explain the dispersion in markups during recent decades: firms with bank ownership are associated with increased markups, whereas firms facing bank-held competitors experience diminished markups. I use the mergers between banks and institutional shareholders as an identification strategy. After the institutional shareholder of a firm’s industry rivals merges with a bank, the firm receives a treatment because the merger generates an exogenous variation in the rivals' bank ownership. I then employ a difference-in-differences test, and find that focal firms experience significantly reduced markups after the formation of rivals' bank ownership. Through mechanism analysis, I find that these firms pay higher borrowing costs in terms of bank loans, which is consistent with the financing channel. The decreased markup effect is stronger for competitive industries and R&D intensive firms. Furthermore, firms are more likely to switch banks, especially when banks have more proprietary information of firms. These results suggest that the information channel is also a plausible mechanism.

The second chapter investigates how common ownership affects product market competition through the lens of firms' advertising strategies, as the literature has not reached a consensus on whether common ownership induces anti-competitive conduct (see Azar, Schmalz,
and Tecu (2018), Azar and Vives (2021), Dennis, Gerardi, and Schenone (2021), Lewellen and
Lowry (2021), and Koch, Panayides, and Thomas (2021)). I revisit this question by gauging the impact of common ownership on firms' advertisement expenditure. Starting with a theoretical model where firms simultaneously choose output quantity and advertisement expenditure, I find that common ownership increases advertising intensity because it helps internalize the positive spillover effects of informative advertisement. Conversely, common ownership decreases advertising intensity because it helps internalize the negative externalities due to combative advertisement.

The empirical investigation supports the model prediction that there is a significant positive relation between common ownership and advertising intensity. I rely on the mergers between two financial institutions as the identification strategy. Using an exogenous variation in common ownership following financial institution mergers, I conduct a difference-in-differences analysis, and find that firms increase their advertising intensity when the mergers increase their common ownership. The effect is more pronounced when the advertisement elasticity of demand is high, price elasticity of demand is low, and products are more homogeneous in an industry. The study thus indicates that common ownership helps mitigate the free-rider problem associated with informative advertisement and boosts aggregate demand. Moreover, increased common ownership leads to higher market power and reduced output quantity.