Big Companies That Have A Lot In Common


Investors do not hold the big stick that bad publicity triggers in the hope shareholders will pressure executives to mend their ways.

Increasingly, the big funds spread the risk across top performers in a sector and seem not unduly bothered by adverse reports in the media.

A recent example is the violent ejection of a passenger from a United Airlines jet and the British Airways baggage handling disaster.

Many hoped the video of David Dao being dragged from his seat by security staff would influence the airline’s policy when the stock plummeted.

But the big investors were unlikely to care.

Tactical investment dilutes competition

Investment guru and billionaire Warren Buffett’s Berkshire Hathaway holds a large swathe of United Airlines shares and could be expected to harbour concerns when the market price plunged.

But Buffett also has large holdings in other US airlines – such as Southwest, American Airlines and Delta.

Passengers fleeing United hit the airline’s revenue, but they went to rivals, pushing up the price of stock and smoothed the losses for Buffett.

Tactical investment or common ownership is seen to dilute the market and make companies less competitive, says economist Jose Azar, who has studied the way institutional investors protect their cash.

His research revealed that as common ownership increased, airlines hiked their fares on shared routes in the knowledge major shareholders would not complain because they had no loss.

Everyone has a piece of the pie

The same theory applies to banking. In cities where major banks all have branches, customers tend to pay more for the same services than in places with fewer branches.

The thinking goes that major shareholders do not want companies to give away profits by competing for business and wherever the customer chooses to do business does not really matter as they have a stake in all the rival businesses.

Azar’s conclusion is that common share ownership across several rivals in a market reduces competition and increases prices.

“Why would common ownership be increasing in the US and other rich economies? Perhaps because common ownership is mostly a function of diversification. As investors become more diversified, they tend to own shares in most of the major companies in an industry. And when everyone owns a little piece of every company, then every company has the same set of owners,” says a recent article on the topic by Bloomberg.

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