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Effect of Increasing Horizontal Shareholding with Index Funds on Competition and Market Prices - Investigation by Agent-Based Model

Recently, some empirical studies have argued that “horizontal shareholding” (or “common ownership”) lessens competition among companies and prevents industries from growing. In particular, index funds horizontally shareholding have become the largest shareholders and has become a subject of greater debate. In this study, I built an artificial market model, a kind of agent-based model, and investigated the effect of increasing horizontal shareholding with index funds on competition and market prices. My result shows that even when the holding ratio of index funds is not that high, the funds lessen competition. Moreover, when the value of a company unsuccessful at competition drops, its market price falls deeper than the company value (overshoots) and the company becomes undervalued; then, the number of shareholders who encourage competition increases, and the company gains competitive power, vice versa. My simulation result indicated that such a mechanism balances competitive powers among corporations. Growing index funds may possibly weaken this mechanism.