Carola Schenone and Patrick Dennis
McIntire Finance Professors Patrick Dennis and Carola Schenone, with co-author Kristopher Gerardi from the Federal Reserve Bank of Atlanta, recently earned the prize for “Best Conference Paper” at the 2018 European Finance Association (EFA) Annual Meeting. The prestigious award recognizes their paper, “Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry,” which refutes a recently popularized theory on institutional ownership of competing firms and its effect on individual investors.
Co-hosted by the Imperial College London and the SGH Warsaw School of Economics, the EFA’s annual meeting, which was held Aug. 22-25 in Warsaw, Poland, this year, is considered one of the three top annual general finance conferences in the world (along with the American Finance Association and the Western Finance Association conferences). Schenone, Dennis, and Gerardi’s paper was chosen from among 240 presented, which were picked from more than 1,900 submissions. The stringent selection process for the 45th edition of the conference was executed by reviewers representing esteemed universities across Europe and the United States.
The high-profile acknowledgement should give additional credence to the differing view Dennis, Schenone, and Gerardi proffer on the controversial subject matter.
The trio’s paper contests findings published in The Journal of Finance in “Anticompetitive Effects of Common Ownership,” by Jose Azar, Martin Schmalz, and Isabel Tecu, who hypothesize that institutional investors who control shares in firms competing in the same product market influence companies to engage in behavior that undermines the competitive nature of a free-market economy. The McIntire group found markedly different results in its research and offers a different opinion.
“For example, say that Vanguard, an institutional money management firm, owns shares in both American Airlines and Delta Airlines. The hypothesis put forth in a paper recently published in The Journal of Finance is that common ownership by Vanguard influences both American Airlines and Delta to compete less, thus increasing their ticket prices,” Dennis explains. “We show that this is not true once you correct the data and statistics according to standard practices and control for economic events such as bankruptcy.”
While their paper offers important and relevant insights that may influence how investments are governed in the future, Dennis believes the work may serve to protect individuals and their investment options as well.
“There is current public policy debate about limiting ownership of competing firms by institutions such as Vanguard,” he says. “This could be harmful to individual investors—like us—who invest in mutual funds, by limiting the extent to which Vanguard and other mutual funds can diversify their portfolios.”
Schenone, who presented the paper at the annual meeting in Warsaw in August, adds that she, Dennis, and Gerardi wrote the paper with the intent to raise awareness about the mechanism behind mutual and pension funds.
“We’re hoping to highlight how these prevalent investment tools work, what their objective is, and how they make it possible for the average person to invest in well-diversified portfolios at a low cost,” she says. “We also want to bring a better understanding about how firms compete, and the role of managers in maximizing firm value. Ultimately, we show that ownership of firms in the same industry has no anticompetitive effects.”
