Challenging Predominant Views in Finance Earns LeBow Faculty Member a Major Prize

A major prize in academic research is always the result of hard work over many years. For TD Bank Professor of Finance Michelle Lowry, PhD, a recent award provided recognition for some significant findings that went against a predominant view in financial research.

In May, Lowry and her co-author, Katharina Lewellen, PhD, of Dartmouth College’s Tuck School of Business, received the Jensen Prize from the Journal of Financial Economics for their July 2021 paper “Does common ownership really increase firm coordination?”

In their paper, Lowry and Lewellen reassess claims from a series of academic publications that found that common ownership — the case of one asset manager holding stock in two competing firms — was leading to anti-competitive behavior.

As major asset management firms — in particular, the so-called “Big 3” of Vanguard, BlackRock and State Street — have grown in recent years, multiple papers in major finance journals have focused on cases of common ownership. This stream of literature claimed that common owners — including, for example, the “Big 3” — were either directing the companies they hold to engage in illegal, anti-competitive behavior, such as price fixing, or at a minimum facilitating such anti-competitive behavior.

Legislative proposals to restrict activities by large institutional investors have come about as a result of these recent publications. The concern is that such proposals may not adequately consider the potential downsides on those firms and the individuals and companies whose portfolios they manage.

“Looking back on it, those initial claims of coordination didn’t seem right to us,” Lowry said.

The co-authors found that many of these papers were “mis-specified” in their scope and parameters, making claims about the effect of common ownership that could be attributed to other factors, such as the fallout from the 2008-09 global financial crisis.

“When you’re overturning previous papers, there’s a lot of pressure to get it right,” Lowry said.

When the co-authors presented their initial findings at the Society for Financial Studies Cavalcade, a major academic conference in finance, they received a lot of attention.

“It was standing room only, and our presentation got a lot of people talking,” she said. “We were disagreeing with a lot of people in the profession, but we aren’t alone.”

She adds that out of 17 previous papers cited, 15 of them found that common ownership had an effect; the authors of one of those papers revised their findings — switching sides, in effect — after the initial release of their paper.

Lowry said she was especially proud to receive this award for a paper co-authored with Lewellen, with whom she has known since they were both in graduate school at the University of Rochester.

“Academic research has an impact, and major policy decisions are made based on it, so this is really motivating to continue work in this area and to keep pushing things forward,” she said.

Lowry and Lewellen’s paper, “Does common ownership really increase firm coordination?,” was published in July 2021 in the Journal of Financial Economics and is available online here.

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