Does Common Institutional Ownership Mitigate Hold-up Problems Along The Supply Chain?

Abstract

We show that common institutional ownership (CIO) along the supply chain mitigates hold-up problems faced by supplier-customer relationships resulting from incomplete contracts. Suppliers make more relationship-specific investments towards their customers that share common institutional investors. Such effect is stronger as the CIO network between a supplier and customer pair becomes wider and deeper. We establish causality by exploiting exogenous shocks to CIO using a broad sample of mergers between financial institutions and further find the CIO effects on suppliers’ investment specificity are stronger for those who ex-ante face severer hold-up concerns. Our work sheds light on the hold-up concerns mitigation effect of CIO on firms’ decision to make relationship-specific investments along the supply chain.