Job market paper

Overlapping ownership in vertical relations: From fostering to tunneling

The literature identifies several ways in which overlapping shareholders can reduce contractual and informational frictions between potential customers and suppliers. These effects, however, are compatible with overlapping owners also extracting private benefits from minority shareholders. I propose an instrumental variables approach to estimate the effect of more similar ownership structures separately from the effect of more concentrated ownership on either side of the relationship. My findings indicate that overlapping shareholders promote trading partnerships among companies within their portfolios, though the effect becomes four times larger when shareholder concentration differs substantially across companies. I argue that overlapping shareholders can create asymmetric incentives among managers, in which the diluted company prioritizes the partner's gains while the concentrated company ignores potential losses for the other firm. Consistent with this mechanism, the same feature that makes a deal appealing to both parties can make it one-sided, fostering trading partnerships that enable tunneling along the supply chain.

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