Institutional owners and competitive rivalry

Abstract

Scholars have increasingly recognized the importance of institutional owners in the life of the firm and have sought to explain how and when these owners influence firm-level strategies. In spite of evidence that these owners can and do affect broad strategies, there is little empirical support for the extent to which institutional investors involve themselves at the level of strategic competitive actions that firms undertake. This raises the question: "How do different types of institutional investors affect strategic competitive activity between firms?" Further, owners have a unique bearing on competitive activity insofar as they can simultaneously influence firms that are competing with each other. Therefore another important question is: "How are the relationships between institutional investors and strategic competitive activity affected when those investors hold stakes in both the focal firm and their competitor?" Borrowing from the accounting literature, this dissertation classifies institutional owners into three groups based on their historical trading behavior: transient, dedicated, and quasi-indexer. Findings from examination of the ownership holdings and strategic competitive activity of thirty-six Fortune 500 rivalries over the years 1997-2006 provide insight into these questions. High levels of dedicated institutional ownership are associated with greater strategic competitive activity whereas high transient institutional ownership is associated with low strategic competitive activity. The relationship between dedicated ownership and strategic competitive activity is moderated by common ownership of a focal firm and its rival. As dedicated ownership of the focal firm and its rival increase together, strategic competitive activity is reduced. The results presented here change the way we apply agency theory to explain firm governance. For competitive dynamics researchers, this study points to a previously unexplored means by which firms are motivated to engage, or not engage, in competitive activity. This study also has broad implications for managers, investors, and policymakers.