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 (RSIs) measured by R&D and patent filings toward 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’ innovation specificity are stronger for those who ex ante face severer hold-up concerns. Lastly, we provide evidence that CIO involvement increases the combined valuations of supply chain pairs (mainly for customers). Our work sheds light on the hold-up mitigation effect of CIO on firms’ decision to make RSIs along the supply chain.