Collusion or governance? Common ownership and corporate risk‐taking

• Published date: 01 July 2024
• Author: Shouyu Yao,Xinyu Guo,Ahmet Sensoy,John W. Goodell,Feiyang Cheng
• Date: 01 July 2024
• DOI: http://doi.org/10.1111/corg.12562

SPECIAL ISSUE ARTICLE

Collusion or governance? Common ownership and corporate

risk-taking

Shouyu Yao

1

| Xinyu Guo

2

| Ahmet Sensoy

3,4

| John W. Goodell

5

|

Feiyang Cheng

6

1

College of Management and Economics,

Tianjin University, Tianjin, China

2

Faculty of Science, The Hong Kong

Polytechnic University, Hong Kong, China

3

Faculty of Business Administration, Bilkent

University, Ankara, Turkey

4

Adnan Kassar School of Business, Lebanese

American University, Beirut, Lebanon

5

College of Business, The University of Akron,

Akron, Ohio, USA

6

School of Economics and Management,

Beijing Jiaotong University, Beijing, China

Correspondence

Feiyang Cheng, School of Economics and

Management, Beijing Jiaotong University,

Beijing, China.

Email: fycheng@bjtu.edu.cn

Funding information

National Natural Science Foundation of China,

Grant/Award Number: 72073101

Abstract

Research Question: Disputes over the corporate governance impacts of common

ownership continue. Differentiating from existing studies, we focus on the Chinese

stock market, exploiting the Top 10 Shareholding File, which includes various inves-

tors besides institutional investors, to study the impact of common ownership built

through blockholders on corporate risk-taking behavior.

Research Findings: We find that firms with higher common ownership are less likely

to engage in corporate risk-taking, with concomitant decreases in future growth

rates. Mechanism analysis shows that blockholders' common ownership exerts its

influence through increasing market concentration, with concomitant lessening of

market competition. Interestingly, further analyses indicate that, in contrast to bloc-

kholders, ownership connectedness built by mutual fund families significantly raises

corporate risk-taking along with growth. However, individual investors' common

ownership does not show the significant statistical relationship with corporate risk-

taking.

Theoretical Implications: We add to the debate on common ownership on corporate

governance. Consistent with the anti-competition stream of literature, the risk-

taking-reduction role we identify for blockholder common ownership supports the

theory of anti-competition. Our results highlight the need to consider the heteroge-

neity of common ownership.

Policy Implications: While blockholder common ownership is evidenced to have a

negative effect on corporate risk-taking, with, by extension, a negative impact on

economic development, our results also suggest that efficient monitoring mitigates

these effects. We also document an interesting heterogeneity in investor types.

Mutual fund common ownership, in contrast to blockholder common ownership, is

associated with higher risk-taking and more robust firm growth. This suggests the

positive role of institutions in corporate governance and the necessity of considering

the heterogeneity of common ownership.

KEYWORDS

corporate governance, blockholders, common ownership, risk-taking

Received: 15 August 2022 Revised: 25 August 2023 Accepted: 13 September 2023

DOI: 10.1111/corg.12562

Corp Govern Int Rev. 2024;32:645–669. wileyonlinelibrary.com/journal/corg © 2023 John Wiley & Sons Ltd. 645

1|INTRODUCTION

Common ownership, which occurs when common blockholders simul-

taneously own a large proportion of at least two competing firms in

the same industry, has gained influence in the market, attracting con-

siderable scholarly interest (Azar et al., 2018; Gilje et al., 2020; Park

et al., 2019). Common blockholdings create linkages between inde-

pendent competing firms. Such common ownership seems to be the

opposite of the conventional theory of diversifying investment portfo-

lios to minimize specification risks. However, common blockholders

concentrate their investments by purchasing firms in selected indus-

tries, based on the belief that this concentration can compensate for

the cost of under-diversification (Hemphill & Kahan, 2019). Previous

studies on the US stock market focus on whether the common owner-

ship of institutional investors inhibits market competition (Ant

on

et al., 2023; Azar et al., 2018; Cheng et al., 2022; Lu et al., 2022).

However, the existing conclusions are controversial (Dennis

et al., 2022; Koch et al., 2021; Lewellen & Lowry, 2021). More impor-

tantly, existing studies explored the influence of common ownership

on corporate governance and the relevant economic consequences

(Brooks et al., 2018; Cheng et al., 2022; Edmans et al., 2019;He&

Huang, 2017; Kang et al., 2018; Park et al., 2019; Ramalingegowda

et al., 2021).

Our study follows from a general call for more studies investigat-

ing the role of ownership types and structures on corporate gover-

nance and, by extension, to firm and investor characteristics.

Guedhami et al. (2022) highlight that investigating the impact of own-

ership structure and ownership type is challenging in corporate gover-

nance studies. From a corporate governance perspective, studying

how ownership structure affects firms is currently very important

(Castañer et al., 2022). This includes considering the conditioning roles

of institutional differences (Tran & Freel, 2023), ownership concentra-

tion (Ramírez et al., 2022), foreign institutional ownership (G. Huang

et al., 2023), managerial ownership (Bian et al., 2023), foreign direct

ownership (W. Huang et al., 2021), nonprofit versus for-profit owner-

ship structures (Goodell et al., 2020), and state ownership (Tran &

Freel, 2023). These studies also consider investment decisions

(Ramírez et al., 2022), firm and investor risk-taking (G. Huang

et al., 2023), and cross-ownership (Fu et al., 2022). However, by syn-

thesizing prior studies, we investigate the impacts of a broader variety

of cross-ownership.

Disputes over the impact of common ownership on corporate

governance continue. Existing studies typically focused on the role of

institutional investors' common ownership in developed capital mar-

kets, typically in the United States, with few investigations in emerg-

ing capital markets. Further, as Hemphill and Kahan (2019) note,

previous studies focusing on US markets rely on ownership data that

omit the holdings of certain categories of blockholders. These owner-

ship data are always drawn from Form 13F and quarterly reports filed

by large institutional investors who are less likely to disclose the hold-

ings of non-institutional corporate holders, such as individuals and

firm managers. Institutional investors differ from non-institutions in

terms of fund availability, investment horizon, risk preference, and so

on (Clifford & Lindsey, 2016; Cornett et al., 2007; Hadlock &

Schwartz-Ziv, 2019; Lin & Fu, 2017) and are more concerned about

profitability rather than control power because of restraint by perfor-

mance appraisals and strict market regulation (Yuan et al., 2008). This

may partly explain why existing findings diverge. Additionally, as sev-

eral studies mention, such as those by Edmans et al. (2019), Hemphill

and Kahan (2019), He et al. (2019), Iselin et al. (2021), and Y. Chen

et al. (2021), in any analysis of anti-competitive effects, it is of great

significance to distinguish the economic consequences of dedicated

institutional common owners, such as common mutual fund owner-

ship, from blockholder common ownership, because mutual funds

have weaker incentives and the ability to generate anti-competitive

effects. However, a comparison between common ownership con-

nected by mutual funds and other blockholders has not yet been

conducted.

To address the aforementioned research gaps and different

from existing studies, we focus on the Chinese stock market,

exploiting the Top 10 Shareholding File, which includes various

investors beyond institutional investors, as the research sample to

study the impact of common ownership built through blockholders

from the perspective of corporate risk-taking behavior.

1

To examine

the potential economic channels, we also explore whether common

ownership constrains firm competition. Notably, we also compare

and distinguish the above impacts and effects of common owner-

ship built through individual majority shareholders from those built

through mutual funds. This comparison provides additional

contextual insights into the significance and market power impacts

of common ownership.

Specifically, corporate risk-taking is a significant driving force of

financial performance and growth (John et al., 2008; Lewellyn &

Muller-Kahle, 2012). Risk-averse firms may be more conservative in

making investment decisions and forgoing profit opportunities.

Although risks are omitted, firms may bypass value-enhancing projects

that are crucial for long-term growth. Based on the findings of existing

literature, we conjecture that two opposing arguments exist regarding

the impact of blockholders' common ownership on corporate

risk-taking. One view is that there is a positive relationship between

blockholders' common ownership and corporate risk-taking

behavior. Existing research, primarily in the US market, which typically

exhibits highly diversified ownership structures, has demonstrated the

beneficial influence of common institutional ownership on firm

performance. Thus, firms may benefit from improvements in

monitoring to help them better understand risk–return trade-offs and

be more willing to undertake higher risk to raise firm value

(E. H. Kim & Lu, 2011).

An alternative view is that a negative relationship exists between

blockholders' common ownership and corporate risk-taking behavior.

Ant

on et al. (2023) suggest that firms with common ownership tend

to reduce their managerial incentives to avoid competition. In this

vein, investors' utility functions are such that the expected losses from

risk increase with increases in the intra-industry concentration of

646 YAO ET AL.