The Causal Mechanisms of Horizontal Shareholding

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2019-05-23

Posted by Einer Elhauge (Harvard Law School), on Thursday, May 23, 2019
Editor's Note: Einer Elhauge is the Petrie Professor of Law at Harvard Law School. This post is based on his recent paper. Related research from the Program on Corporate Governance includes Horizontal Shareholding (discussed on the Forum here) and New Evidence, Proofs, and Legal Theories on Horizontal Shareholding (discussed on the Forum here), both by Einer Elhauge; The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

As I have shown in another paper, repeated empirical studies confirm that, in concentrated markets, higher levels of horizontal shareholding make anticompetitive effects more likely. Nonetheless, some critics argue that we should delay enforcement action until we have more proof on the causal mechanisms by which horizontal shareholders influence firm behavior. In my new paper, The Causal Mechanisms of Horizontal Shareholding, I show that these critiques are mistaken.

The Ample Evidence on Causal Mechanisms

Institutional investors now cast 93% of shareholder votes at S&P 500 firms and are increasingly diversified in ways that give them horizontal shareholdings. The weight that firms put on the profits of other firms can range from 0% (if the firms are totally separately owned) to 100% (if one firm 100% owns the other). Horizontal shareholdings have risen so much that by 2017 the average weight that an S&P 500 firm put on the profits of other firms in their industry was 75%. There are multiple mechanisms by which horizontal shareholders use this power to influence firms.