Governance or collusion? The M&A effects of common institutional ownership

Common institutional ownership: economic impact and M&A

Previous studies on the economic consequences of common institutional ownership primarily focus on intra-industry common ownership, emphasizing its dual governance and collusion effects. In terms of governance effects, common institutional investors can establish collaborative governance mechanisms through cross-company shareholding within the same industry, thereby enhancing their monitoring capabilities. Because of the alignment of interests between common institutional investors and their portfolio companies, these investors are highly incentivized to uncover and communicate information, thus mitigating information asymmetry and enhancing corporate transparency (Ramalingegowda et al., 2021). Furthermore, by leveraging their expertise and governance experience, common institutional investors play an active role in corporate governance. For instance, He et al. (2019) found that common institutional investors tend to oppose CEO proposals, fulfilling their oversight function. Their governance effects further extend to promoting improvements in market share and innovation productivity (He and Huang, 2017; Ding, 2023), curbing opportunistic behavior (Dai et al., 2024), increasing green investment (Lu et al., 2024), and enhancing corporate ESG performance (Schiehll and Kolahgar, 2024).

In contrast, the collusion effect suggests that common institutional investors may facilitate information exchange and resource sharing between companies within the same industry, potentially leading to market governance failure or inefficiency (Azar et al., 2018). For example, He and Huang (2017) argue that common institutional investors may undermine market competition by fostering collusive behavior. Azar et al. (2018) further found that these investors could distort market pricing mechanisms by forming strategic alliances, potentially resulting in higher product prices.

Unlike studies on cross-industry common ownership, there is a limited body of literature examining the economic impact of common ownership between the two parties involved in a transaction. For example, institutional investors holding shares in both sides of a supply chain transaction can reduce transaction costs and stabilize the supply chain (Freeman, 2023). Some research suggests that investors holding shares in both parties of a M&A may drive value-destroying deals to maximize portfolio returns (Matvos and Ostrovsky, 2008). However, Brooks et al. (2018) challenge this view, showing that common institutional investors can enhance M&A performance by reducing the acquisition premium.

In summary, existing research primarily focuses on the economic consequences of cross-industry common ownership, emphasizing the dual roles of common institutional ownership in governance and collusion (He and Huang, 2017; Azar et al., 2018). While a few studies examine the impact of common ownership between parties in a transaction, the debate continues regarding its effectiveness in enhancing M&A performance (Matvos and Ostrovsky, 2008; Brooks et al., 2018). However, the existing literature is largely limited to single-scenario analyses and has not fully explored the dual functions and mechanisms of common institutional ownership throughout the entire M&A process. Therefore, this paper adopts a comprehensive approach to the M&A process, systematically investigating the dual roles of common institutional ownership in pre-decision constraints and post-merger performance. This study not only clarifies the governance mechanisms of common institutional ownership but also makes a significant contribution to the field, broadening the scope of research on its impact on corporate behavior.

Common institutional ownership and M&A

Corporate M&A inherently carries high risk and uncertainty, with more than half of M&A transactions failing to create value for companies (Sirower and O’Byrne, 1998), and some even resulting in value destruction (Bae et al., 2002; Zhu et al., 2024). The primary causes of these failures include information asymmetry before the merger (Ahern and Harford, 2014), improper target selection (Palepu, 1986), and ineffective resource integration, which all hinder value creation in M&A. Among these factors, significant information asymmetry in M&A transactions is a major barrier to value realization. Information asymmetry not only heightens the risk of M&A failure but also creates opportunities for insiders to exploit minority shareholders. In China, more than 51.2% of M&A transactions involving listed companies fail to create value, often leading to a reduction in company value (Zhu et al., 2024). Consequently, addressing information asymmetry and improving M&A performance have become central concerns in M&A research.

As a crucial governance mechanism, common institutional ownership plays a significant role in mitigating information asymmetry and improving M&A performance through its informational advantages and governance capabilities (Irani et al., 2023). By holding stakes in multiple companies, common institutional investors gain access to private information from various firms, reducing information asymmetry in M&A and acting as information bridges that facilitate knowledge sharing between companies (Park et al., 2019). This information transmission mechanism is especially critical in the target industry, as it helps reduce uncertainties in target selection and mitigate industry risks, thereby improving M&A performance. Additionally, common institutional ownership influences corporate decision-making through mechanisms such as board appointments and voting (He et al., 2019), while mitigating managerial opportunism and short-term profit-seeking behavior (Zhou et al., 2025). These actions lead to more informed M&A decisions and the creation of merger value.

The informational and experiential advantages of common institutional ownership are critical drivers of its governance effectiveness. On one hand, its industry-specific informational advantage allows common institutional ownership to select M&A targets with greater accuracy, reducing the likelihood of misguided acquisitions. Studies indicate that selecting the right acquisition targets is essential for enhancing merger value (Palepu, 1986), and high-quality targets are crucial for improving M&A performance. By leveraging its deep industry knowledge, particularly its insights into potential targets, common institutional ownership helps mitigate information asymmetry in M&A decisions, improving target selection accuracy and reducing inefficient acquisitions. Conversely, during the post-merger integration phase, common institutional ownership utilizes its industry governance advantage to enhance integration efficiency with the target company’s industry, thereby generating merger synergies (Brooks et al., 2018).

Additionally, grounded in signaling theory, common institutional ownership accumulates significant M&A experience through sustained investments. This experience includes both the evaluation and management of acquisition deals, as well as best practices for post-merger integration. By leveraging this experiential advantage, common institutional ownership can effectively guide companies in making more informed acquisition decisions and provide strategic support during the integration phase. Through its informational influence, common institutional ownership transfers accumulated M&A experience and industry knowledge to corporate decision-makers, reducing information asymmetry in target selection, lowering transaction risks, and ultimately enhancing merger value (Zhu et al., 2024).

The governance advantages of common institutional ownership play a pivotal role in overseeing M&A decisions and enhancing merger value. Common institutional investors possess both the capacity and motivation to engage in corporate governance, effectively overseeing decisions made by major shareholders and management (Park et al., 2019; Kang et al., 2018). Due to their typically larger stakes and diverse investment portfolios, common institutional investors can leverage accumulated management experience to conduct in-depth analyses of M&A transactions, thereby encouraging more rational decision-making by management. Additionally, their extensive governance experience enhances the effectiveness of supervision (Kang et al., 2018). To enhance their governance role, common institutional investors can participate directly in corporate governance by appointing directors (Zhou et al., 2025), thus improving the quality of M&A decisions. This governance experience, particularly within peer companies, can be effectively transferred, reducing supervision costs. Furthermore, to optimize portfolio returns, they can curb opportunistic behavior from major shareholders (Zhou et al., 2025), such as using M&A for rent-seeking or blindly expanding business empires, ensuring that M&A decisions align with the company’s long-term value creation objectives. Thus, by enhancing supervisory governance, common institutional ownership not only constrains M&A decisions but also improves merger quality, ultimately enhancing merger value (Zhu et al., 2024). Based on these insights, we propose the research hypothesis H1a:

H1a: Common institutional ownership has a positive M&A effect, reducing the probability of inefficient M&A and enhancing merger performance.

However, the governance role of common institutional ownership is not always advantageous. The ability of common institutional ownership to actively participate in corporate governance and enhance M&A value is largely contingent upon its willingness to engage in governance. According to the “ineffective supervision” hypothesis, institutional investors may fail to provide effective governance due to their short-term profit-seeking tendencies (Parrino et al., 2003). These investors often adopt an “exit strategy,” selling stocks when company performance deteriorates rather than actively engaging in corporate governance (Hansen and Lott, 1996). Moreover, because common institutional investors hold stakes in multiple companies, their limited time and attention may further undermine the effectiveness of supervision (Kempf et al., 2017), limiting their ability to focus adequately on individual firms’ M&A decisions and, consequently, diminishing their capacity to enhance M&A performance.

The competition-collusion hypothesis posits that common institutional investors prioritize optimizing the overall value of their investment portfolios rather than maximizing individual firm profits. Therefore, they are motivated to encourage firms to reduce excessive competitive strategies and avoid a “mutual destruction” scenario (Cheng et al., 2022). Simultaneously, due to potential conflicts of interest, common institutional investors may facilitate the formation of alliances between firms to increase market share and bargaining power, thereby seeking collusive advantages (Azar et al., 2018). As market competition diminishes, firms become less reliant on M&A to strengthen their competitive position. Under such conditions, the M&A experience and industry advantages of common institutional owners may become profit channels, where collusion with management results in unnecessary M&A decisions aimed at fulfilling management’s desire to create a “business empire,” ultimately leading to blind M&A that fail to enhance performance.

H1b: Common institutional ownership has a negative M&A effect, increasing the probability of inefficient M&A and reducing merger performance.