Defusing the Antitrust Threat to Institutional Investor Involvement in Corporate Governance

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2017-03-14

Posted by Edward B. Rock, New York University School of Law, and Daniel L. Rubinfeld, NYU School of Law, on Monday, March 13, 2017
Editor's Note: Edward B. Rock is Professor of Law at New York University School of Law; and Daniel L. Rubinfeld is Professor of Law at NYU School of Law and Robert L. Bridges Professor of Law Emeritus and Professor of Economics Emeritus at the University of California, Berkeley. This post is based on recent paper by Professor Rock and Professor Rubinfeld.

For the past thirty years, regulatory reform efforts have focused on encouraging diversified institutional investor involvement in corporate governance. Now, some recent economic research threatens to chill these developments. In Azar, Schmalz and Tecu (working paper 2015) and Azar, Raina and Schmalz (working paper 2016), the authors argue that concentration among shareholdings by institutional investors has led to higher prices in two relatively concentrated industries: airlines and banking. Based on this research, Einer Elhauge (2016) has argued that current ownership patterns by diversified institutional investors violate Section 7 of the Clayton Act. Following on Elhauge’s piece, Posner, Scott Morton and Weyl (working paper 2016) propose a “solution” in which diversified investors would be limited to acquiring one firm in any oligopolistic industry.