The ownership of large public companies by mutual funds and other large asset managers poses little anticompetitive threat, Edward Rock and Daniel Rubinfield claim in their new paper "Defusing the Antitrust Threat to Institutional Investor Involvement in Corporate Governance."
The two professors at NYU School of Law try to rebut previous studies in which scholars Jose Azar, Sahil Raina, Martin Schmalz and Isabel Tecu argue that the concentrated ownership of public companies has significant anticompetitive effects in concentrated markets. That work in turn has inspired other scholars to argue for much more aggressive antitrust enforcement of institutional investors, who hold about 70% of the stock of U.S. public companies. TheStreet examined the debate in September.
Azar and his colleagues focused on airlines, arguing that between 2013 and 2015 "seven major institutional investors combined to hold substantial shares of the four major U.S. airlines" and that as a result airline fares had risen about 10% more than they otherwise would have.
What Washington should do about the Azar findings is the subject of another prominent paper, written by Harvard Law School professor Einer Elhauge, who called the Azar study an "economic blockbuster." Obama administration officials weighed in last April in a paper listing common ownership of stock by large institutional investors as one of several areas where new regulations might be necessary to address increasing concentration in several industries.
Rock, a corporate law professor, and Rubinfield, an antitrust specialist, begin by delving into the ownership of Delta (DAL - Get Report) , JetBlue (JBLU - Get Report) , Southwest (LUV - Get Report) and United Continental (UAL - Get Report) . They find that BlackRock (BLK - Get Report) , Fidelity Management and Research and Vanguardare the only three large asset managers whose funds hold stock in all four carriers. BlackRock and Vanguard manage large index funds, so their ownership profile is to be expected. Other asset managers have very different stakes; T. Rowe Price (TROW - Get Report) , owned 13.9% of United and 5.3% of Southwest but didn't have a stake in Delta or JetBlue.
Furthermore, Rock and Rubinfield note, BlackRock and Vanguard also manage funds that own stock in airline suppliers such as Boeing (BA - Get Report) and Exxon Mobil (XOM - Get Report) and customers such as General Electric (GE - Get Report) , General Motors (GM - Get Report) and IBM (IBM - Get Report) . While the two stockholders would have seen their airline stocks go up as a result of fare increases, suppliers and customers would have been hurt. It would be impossible for managers of a diversified mutual fund to disentangle such effects, Rock and Rubinfield write.
They believe it's impossible for large institutional investors to use the standard levers of corporate governance to encourage anticompetitive behavior by portfolio companies. "There is no obvious way in which shareholders can vote for 'soft competition,' " the two scholars write.Nonetheless, they credit Azar and his colleagues for drawing attention to the implications of rising levels of institutional investor ownership, concentration and involvement in corporate governance for antitrust enforcement. But Rock and Rubinfield advocate a conservative approach to the issue. At the end of their article, they propose an antitrust safe harbor for investors, like the typical mutual fund, that hold 15% or less of a company, have no board representation, and limit themselves to normal corporate governance activities-essentially, what is defined as "passive investment" under SEC Rule 13D.