Management Accounting Section Midyear Meeting

The Effect of Common Ownership on a Firm's Investment Decisions Under Uncertainty

• In Event: Interfirm Issues

Abstract

This paper examines the effects of firm-level common ownership on investment when firms face uncertainty. Theory and prior research suggest common ownership decreases competition and leads to a deadweight loss for the economy. One proposed channel for this deadweight loss is through decreased investment. However, real option theory suggests when firms face uncertainty it is better to delay investment until the uncertainty is resolved. Unfortunately, the ability of firms to wait is limited when competition is high due to the fear that competitors might preempt. We predict and find that common ownership, which decreases competition, allows firms to enjoy the value of waiting in the presence of uncertainty to a greater extent relative to firms without common ownership. We also find that the level investment by firms with common ownership when uncertainty is high is associated with larger future returns relative to investments made when uncertainty is low. This suggests the observed decrease in investment when uncertainty is high generates more value. Overall, the evidence indicates that common ownership by institutional blockholders provides firms with benefits by allowing them to delay investment in the face of uncertainty.

Authors

• In Gyun Baek, University of Wisconsin Madison

• Sewon Kwon, Sejong University

• Daniel Patrick Lynch, University of Wisconsin-Madison