Corporate ownership and antitrust violations
A long-running literature in industrial organisation has been devoted to understanding the web of incentives that make firms more likely to engage in anticompetitive practices. Some of the determinants scrutinised in this literature include industry conditions, demand elasticity, and firms’ structural characteristics (Levenstein and Suslow 2006). A parallel line of inquiry has suggested that a firm’s corporate governance may have significant implications for anticompetitive practices (Campello et al. 2017, Lambertini and Trombetta 2002). Yet, there is an important element that has been neglected in this debate, i.e. a firm’s ownership type.
In recent work (Amore and Marzano 2019), we investigate how the identity of corporate owners influences the likelihood to engage in anticompetitive practices. Specifically, we explore the role of family ownership and contrast it with other ownership forms. Many companies around the world are owned by families (see e.g. Faccio and Lang 2002), who not only enjoy cash-flow rights but tend to play an active role in setting corporate priorities (Mullins and Schoar 2016). As we shall argue, family ownership can also have a significant influence on a firm’s competitive conduct. After having established the effect of family ownership on antitrust violations, we explore the different strategic reactions by family and non-family firms to an antitrust injunction.
The relationship between family ownership and antitrust violations
Why should family ownership matter for a firm’s likelihood to contravene antitrust laws? The first mechanism we discuss relates to reputational concerns. It is well known that family owners devote a large amount of monetary and personal resources to their firms. Such intertwinement between family and business triggers a strong attachment to the company, which, in turn, makes family owners subject to strong reputational concerns (Deephouse and Jaskiewicz 2013). Accordingly, existing works show that family owners strive to improve the social image of their companies (Dyer and Whetten 2006, Chen et al. 2010). As a result, family firms may be more reluctant to take actions that violate antitrust law, which may grant extra profits in the short-term at the risk of damaging the family’s reputation.
The second mechanism relates to coordination issues. Anticompetitive practices such as cartels require an orchestration of resources and coordination on incentive-compatible strategies by several firms. To this end, group identification and informational transparency (Bourveau et al. 2019, van Driel 2000) among potentially colluding firms is key; absent these features, coordination and monitoring costs may drain the benefits of the anticompetitive practice. Existing evidence shows that family firms tend to pursue objectives that are idiosyncratic to the needs of each family and adopt family-centric governance structures that dampen external scrutiny and informational transparency (Anderson et al. 2009). These features may make family firms less likely to fit in anticompetitive practices that require coordination across multiple firms.
The third mechanism relates to differences in regulatory action. The investigative activities of the antitrust authority typically rely on the search and elaboration of available information. These activities are facilitated when firms disclose more information to the market, e.g. due to the presence of independent directors (Campello et al. 2017). Because of their reticence toward outside scrutiny, family firms may represent a less attractive target for an antitrust authority willing to maximise the likelihood of sanctioning under budget constraints. Therefore, family firms may display a lower likelihood of being involved in antitrust investigations.
To empirically evaluate these arguments, we employ a longitudinal dataset of Italian companies from 2001 to 2015 that contains rich information on ownership structures, as well as on whether or not a firm has been prosecuted by the antitrust authority, the type of antitrust violation, its duration, and the actions undertaken by the authority. Our analyses indicate that – even after accounting for several variables such as firm size, leverage, industry concentration, and profitability – family firms are almost twice less likely to be prosecuted by the antitrust authority. We confirm this finding using a matching analysis based on observationally equivalent pairs of family and non-family firms, as well as exploiting a regulatory change aimed at relaxing the notoriously stringent Italian law on succession.
Figure 1 illustrates the intensive margin of family ownership on the probability of antitrust indictment. As shown, an increase in the share of equity held by a family corresponds to a decrease in the probability of antitrust violation. Figure 2 explores the probability of antitrust indictment as a function of firm size separately for family and non-family firms. As expected, the probability of indictment increases with firm size. However, this effect is mostly present among non-family firms – for family firms, the probability of antitrust indictment is consistently below that of non-family firms at any point of the size distribution.
Figure 1 Probability of antitrust indictment by share of family equity
Note: This figure illustrates the predicted probability of antitrust indictment (derived from a logit regression) at different values of the share of family equity. The coloured area indicates the 5% confidence interval.
Figure 2 Probability of antitrust indictment by firm size
Note: This figure illustrates the predicted probability of antitrust indictment (derived from a logit regression) at different values of the share of family equity separately for family and non-family firms. The coloured areas indicate the 5% confidence intervals.
To test the mechanisms behind these results, we construct a proxy of corporate prominence by taking the ratio between a firm’s employees and the inhabitants in the municipality of its headquarters. The rationale is that by increasing visibility and commitment towards local stakeholders, a greater corporate prominence should amplify reputational concerns. Our results show that family firms are especially less likely to commit antitrust violations when their corporate prominence is high. By contrast, we find little support for the coordination and regulatory action mechanisms, which we test by examining both accounting measures of informational opaqueness and variations in the outcome of the indictment (i.e. whether the company was fined and, if so, how much).
The consequences of antitrust indictments
In the second part of the study, we explore the material consequences of antitrust indictments. The first question we ask deals with the leadership changes undertaken by family firms hit by an antitrust indictment. If family representation acts as a device to signal a commitment toward reputational improvements to external constituents, then we should observe a greater involvement of family members in top executive positions after the antitrust intervention. Confirming this view, our results indicate that the ratio of family executives increases in the aftermath of the antitrust intervention (while there are no significant changes in the years before). Importantly, this result is not driven by the departure of non-family executives but, rather, by an increase in the absolute number of family executives.
Next, we analyse corporate investment and financing policies in the years following the antitrust indictment. Recent insights show that the increase in competition stemming from antitrust enforcement spurs corporate investment, which is financed mostly through equity issuances in order to retain financial flexibility (Dasgupta and Zaldokas 2019). Consistent with this view, we show that firms increase investment in the post-intervention years. However, separating out by ownership types we find that the investment increase is mostly experienced by non-family firms. This result has a financing rationale – family firms appear reluctant to finance investment via equity issuances so as to avoid control dilution. Again, these findings are not driven by pre-existing trends but, rather, by directional changes around the indictment year.
Contributing to a growing literature at the intersection between corporate finance and antitrust (Campello et al. 2017, Dasgupta and Zaldokas 2019, Dong et al. 2019), our study has documented that family firms engage less frequently in violations of competition law as they strive to protect their social image and legacy. Such a disciplined competitive conduct may bring benefits to customers and stakeholders. Yet, family firms also invest less in the aftermath of the indictment due to their reluctance to issue equity. Thus, the more disciplined competitive conduct comes at a significant cost in terms of slower corporate growth and, potentially, weaker productivity.
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