Morningstar Magazine - December 2017/January 2018 - 34

Spotlight: Abnormal Profitability

Do Vanguard and BlackRock Own Too
Much of Corporate America?
Eric Posner, a University of Chicago
law professor, explains why
he thinks large asset managers need
to be reined in.
Q&A

Haywood Kelly and Aron Szapiro

Eric Posner is the Kirkland and Ellis Distinguished
Service Professor of Law and Arthur and
Esther Kane Research Chair at the University of
Chicago Law School. Among his research interests
is the question of the increasing concentration
of ownership in corporate America, including
the role of institutional investors. A recent paper
he cowrote, in which he proposes limiting
the companies an index fund can own in one
industry, caught our attention, and we wanted
to learn more. We talked with Posner on
two occasions in September. Our conversation
has been edited for clarity and length.
Morningstar: Eric, how did you become involved in this

topic of concentrated ownership?

Eric Posner: I was brought in by Glen Weyl, who
is an economist at Microsoft Research. Glen
and I have worked on many different academic
projects together. Glen had read papers
by José Azar and others that found a strong
correlation between common ownership
by institutional investors and prices that the firms
that they own charge customers.1 Glen
was immediately struck by how powerful this

work was and asked me to write a paper with
him.2 Fiona Scott Morton joined us as
well. Because I am a law professor, I could provide
some of the legal background and analysis
to our paper.

One of the things you argued in your paper was
that under current antitrust law, claims could be made
against companies like Vanguard and BlackRock.
Could you give us a summary of how antitrust law
applies here?

Posner: Under Section 7 of the Clayton Act,3
it's illegal for investors to buy shares of companies
if the effect of the purchases would be
anticompetitive. This is a very broad rule. Now,
there are exception and defenses, which
I will get to in a moment. But just as an initial
matter, if you or I, in our individual capacity,
buy shares of McDonald's MCD or some shares
in a mutual fund, we're not going to have
any effect on competition. But if it's an
institutional investor that already has a large
stake in rival companies within a concentrated
market and it increases those stakes, and
if one can show empirically that the effect of
those purchases is to reduce competition
among the underlying firms, then you've met
that standard.

Can you give us any hint as to what research directions
you might be going there?

Now, nothing in law is as simple as it sounds.
One of the major defenses is something
called the passive investor defense or exception,
which is also in that statute. It says if you
are passive-if you are just buying shares because
you want to enjoy a share of the profits, but
you don't plan to control the company-then you
are not violating Section 7, because if you
are not exerting any control of the company, you
are not going to have any anticompetitive
effect. The institutional investors will argue-
maybe they already have argued-that they fall
within this passive investor exception.

Posner: Sure. We are interested in historical
developments going back to the 19th century. There
is a general tendency of capital markets to
become concentrated. The government or antitrust
authorities react, but then there is this kind
of arbitrage. The capital markets adjust to work
around the constraints created by the
government. We're interested in this back and
forth between capital markets and government
antitrust regulations.

There are other sorts of complications and
questions, but antitrust law is a flexible
area of the law, and of course, [lawyers] are often
aggressive or creative. I think the legal
merits boil down to an empirical question of
whether these purchases really do have
an anticompetitive effect. That's why these
empirical studies are so striking and important,
as they suggest that it's the case.

You've worked with them subsequently as well.

Posner: Yes. We wrote a paper together,
and we wrote some op-eds. Glen and I are writing
a book now, which will come out in early
2018, in which we discuss a range of problems
with the modern market economy in
the United States and in developed countries
generally. We have a chapter where we dig
a little deeper and talk about the ultimate source
of this problem.

1 See, for example, Azar, J., Schmalz, M., & Tecu, I. 2017. "Anti-Competitive Effects of Common Ownership," Journal of Finance, forthcoming.
2 Posner, E., Morton, F.S., & Weyl, E.G. 2017. "A Proposal to Limit the Anti-Competitive Power of Institutional Investors," Antitrust Law Journal, forthcoming.
3 The Clayton Antitrust Act of 1914 strengthened and expanded the rules established by the Sherman Antitrust Act of 1890.

34

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