In our paper, 'Common Ownership and Voluntary Disclosure', which was recently made available on SSRN, we predict and find that common ownership is associated with increases in firms' voluntary public disclosure.
Common ownership refers to the same investor owning shares in competing firms, and has become increasingly common over the last several decades. Although all shareholders seek to maximize their own portfolio returns, common ownership affects the preferred strategies of the firms in which such shareholders invest. Compared to owners with shares in a single firm or those owning shares in multiple firms that do not directly compete, owners with stakes in direct competitors prefer higher industry profits to cutthroat actions by individual firms.
Common ownership may affect disclosure through two mechanisms. First, to the extent that common ownership decreases competition, firms may be less concerned about revealing proprietary information to competitors. Second, common ownership may encourage firms in an industry to collude. Managers who are subject to greater common ownership will want less competitive outcomes, but will be worried about other managers defecting. Economic theory predicts that collusion requires communication between participating parties both for coordinating pricing output decisions and for monitoring to prevent defectors. Given the arguments above, we predict that increases in common ownership will be associated with increased voluntary disclosure regardless of the mechanism. Despite the above theory supporting a positive relationship between common ownership and voluntary disclosure, there are several reasons we may not find the expected association. For example, even if firms desire to collude, they may choose alternative methods of communication (eg trade associations, overlapping directors, or communication between executives with social or professional connections) over public disclosures.
We find evidence consistent with our expectations that common ownership is associated with an increased likelihood of issuing a management forecast, suggesting that common ownership is associated with increases in forward-looking public disclosure, controlling for levels of institutional ownership and a range of firm and industry characteristics.
To provide additional support for our inferences, we also develop and test cross-sectional predictions. First, we predict and find evidence that the positive relation between common ownership and disclosure is less pronounced for firms with more direct communication channels available: industries with overlapping directors (a potential alternative means of communication to facilitate collusion) are less likely to increase public disclosure in the presence of common ownership. This result suggests that increased public disclosure may be used to facilitate collusive outcomes as opposed to resulting only from a decrease in proprietary costs, because the presences of overlapping directors does not directly influence the capital market benefits or the potential competitive harm from disclosure. Second, we predict and find evidence that the relation between common ownership and disclosure is diminished for industries with low barriers to entry. Firms in these industries are likely more concerned about new entrants limiting the effects of reduced competition from existing market participants on disclosure.
A potential concern in interpreting the results of our study is selection bias: large investors may choose to invest in industries in which firms are more forthcoming with disclosure. To mitigate this concern, we take advantage of an exogenous shock (acquisition of Barclays Global Investors by Blackrock in 2009) to support the proposition that increases in common ownership cause managers to change their disclosure behavior.
In summary, the findings from our study support the prediction from the accounting literature that competitive dynamics affect disclosure decisions. Our paper is also among the first to show that the hypothesized relation between common ownership and firm behavior exists in a large sample across multiple industries. Finally, while common ownership is often considered to be detrimental to the economy, our findings provide evidence that there is at least one positive side effect of common ownership in the form of increased disclosure.
Andrea Pawliczek is Assistant Professor at University of Missouri, Columbia and Nicole A. Skinner is PhD student at Leeds School of Business, Department of Accounting, University of Colorado at Boulder.