New Study: Canadian Industry Consolidation Growing
Lax anti-trust legislation and technological disruption spurring industry consolidation
TORONTO – Thursday, July 25, 2019 – Preliminary new research shows that Canadian industry is becoming increasingly concentrated due to weak anti-trust legislation and growing barriers to entry.
The key finding is part of a new working paper by researchers from York University’s Schulich School of Business. The research paper, titled “Are Industries Becoming More Concentrated? The Canadian Perspective”, was recently posted on SSRN (Social Science Research Network, an international online platform that serves as a database for early scholarly research). The study is co-authored by Yelena Larkin, Assistant Professor of Finance at Schulich, and Schulich PhD student Ray Bawania.
The research paper highlights a number of key conclusions, including:
- Large firms have become more dominant
- The volume of M&A deals (mergers and acquisitions) has also increased, particularly between companies operating in the same industry
- The number of publicly traded firms on the Toronto Stock Exchange (TSX) – especially non-financial companies – has dropped over the past decade
- Companies in industries with the largest levels of concentration are generating higher profit margins
According to Yelena Larkin, “The Canadian economy has been affected by two crucial factors that have led to product market consolidation: the first is weak anti-trust legislation and practices; and the second is increasing barriers to entry, potentially related to changing technology.”
Adds Larkin: “We find that large firms have grown bigger and become more dominant, and there has also been, at the same, a steep decline in the number of public firms, the largest players in the economy, also pointing to a consolidation.”
The end result, says Larkin, is that consolidation has led to increased profit margins and market share for bigger companies with less competition. Specifically, the return on assets of Canadian firms has significantly increased in the past two decades in industries where there has been increased consolidation. “Fewer regulatory barriers could incentivize firms to engage in M&A activity and have allowed for mergers with more market power potential,” adds Larkin.
Larkin co-authored a similar research paper that focuses on industry concentration in the US, which has mirrored the increase in consolidation taking place in Canada. Titled “Are US Industries Becoming More Concentrated?”, the paper is co-authored by Larkin, Gustavo Grullon, and Roni Michaely, and is the lead article in the latest issue of Review of Finance. The research findings have garnered international media coverage, including articles in The Wall Street Journal, New York Times and Economist.