Common ownership, firm financial policy and product market strategy
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This dissertation consists of three essays which examine the importance of common institutional ownership of industry rivals for firm financial policy and product market interactions. In the first chapter, I use data on all public firms in the U.S. and their owners to construct a "modified Herfindahl-Hirschman index" (MHHID) of market concentration that is firm-specific and based on the network of institutional ownership between rival firms. I find that increases in MHHID lead to lower firm cash holdings. My findings are consistent with theories which predict that firms facing a lower competitive threat can afford to maintain lower cash buffers. To address potential endogeneity concerns, I exploit a shock to common ownership stemming from outflows associated with a large mutual fund scandal in 2003. In the second chapter, I provide evidence showing that firm pairwise common ownership leads to an increase in rival coordination. I find that pairs of commonly held firms move closer together in product space. These findings are supportive of collaboration theories of common ownership and inconsistent with anti-competitive theories. I further show that when MMHID increases, firms differentiate their products from their rivals. This result is consistent with theories according to which lower competition relaxes constraints and reduces uncertainty and enables firms to choose a more unique product market strategy. The result is inconsistent with escape-the-competition theories of product differentiation. To address potential endogeneity concerns, I exploit exogenous outflows resulting from the 2003 mutual fund scandal. In the third chapter, I propose a new identification strategy, which can be used to study the effects of MHHID. My strategy has substantially better time-series and cross-sectional coverage relative to previously used instruments. Specifically, I first identify mutual funds that are exposed to under-performing industries and are likely to face outflows. Then, I calculate the proportion of the MHHID such exposed funds are responsible for in unaffected industries. I show that this ratio strongly predicts future changes in MHHID, cash holdings and product market differentiation. Building on the same strategy, I also find that commonly held firms move closer together in product space.