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Investors and Firm Market Power: Does the Source of Capital Matter?

Paper Session

Saturday, Jan. 5, 2019 10:15 AM - 12:15 PM

Hilton Atlanta, 209-210-211
Hosted By: American Finance Association
  • Chair: Heather Tookes, Yale University

Bank Concentration and Product Market Competition

Farzad Saidi
,
Stockholm School of Economics
Daniel Streitz
,
Copenhagen Business School

Abstract

This paper documents that concentration in the banking sector is associated with less competitive product market outcomes in non-financial sectors. We argue that a distinguishing feature of credit concentration is the higher incidence of competing firms sharing common lenders, which lowers the cost of debt financing in an industry. This is because common lenders internalize potential adverse effects of higher loan rates on the product market behavior among their competing borrowers. Exploiting plausibly exogenous variation in banks' industry market shares stemming from bank mergers, we find that high-market-share lenders charge lower loan rates. The effect is confined to industries with competition in strategic substitutes where negative output externalities would be greatest.

Value Creation and Persistence in Private Equity

Markus Biesinger
,
European Bank for Reconstruction and Development and Darmstadt University of Technology
Cagatay Bircan
,
European Bank for Reconstruction and Development
Alexander Ljungqvist
,
Stockholm School of Economics

Abstract

We study how private equity (PE) firms generate returns for their investors, by estimating the effects of PE funding on portfolio companies’ operational efficiency and market power. We confirm prior findings that PE funding leads to operational efficiency: both labor productivity and total factor productivity improve as PE-backed companies ramp up investment, employment, and sales. We find no evidence that PE-backed companies increase their market power. In fact, the PE-backed companies in our sample reduce their price markups by 6%, which allows them to gain substantial market shares. Using detailed confidential information obtained from inside PE firms, we show that the PE firms in our sample push for operational improvements and that these improvements are the main drivers of the returns investors receive from PE funds. We find that the majority of the operational improvements instigated by PE firms persist even after they fully exit their investments. These findings are consistent with PE firms’ ability to create long-lasting value as opposed to maximizing short-term returns at the expense of portfolio companies.

Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry

Patrick Dennis
,
University of Virginia
Kristopher Gerardi
,
Federal Reserve Bank of Atlanta
Carola Schenone
,
University of Virginia

Abstract

Institutional investors often own significant equity in multiple firms competing within the same product markets. A recent debate among legal and financial scholars questions whether competitors with "common owners" engage in anti-competitive behavior. This paper questions the applicability of the theory of horizontal mergers and cross-ownership theory in the context of common ownership, and empirically analyzes the relationship between ticket prices and common ownership in the airline industry. In sharp contrast to the findings in Azar, Schmalz, and Tecu (2017), we find no evidence of such a relationship.
Discussant(s)
Gregor Matvos
,
University of Texas-Austin
Steven Kaplan
,
University of Chicago
Todd Gormley
,
Washington University-St. Louis
JEL Classifications
  • G3 - Corporate Finance and Governance