(Bloomberg) -- The world’s largest asset managers are muscling into an academicdebate, attempting to rebut research into their market power beforelawmakers latch onto it to support investing curbs.

In a paper set for release this week, BlackRock executives led by Vice ChairmanBarbara Novick question the methodology and conclusions of academicwork that finds that asset managers’ ownership stakes in rivalcompanies can undermine competition and lead to higher prices forconsumers. The firm’s executives said it’s too early for governmentofficials to take action based on the studies.

Researchers at the University of Chicago and Yale Universityhave proposed curtailing big asset managers’ investments in a givenindustry. Another study sets out possible changes to votingrules.

BlackRock, which manages $5.1 trillion in assets, said suchmeasures could harm retail investors and upend the growingindex-fund business, a view shared by senior executives at VanguardGroup Inc. and State Street Corp.

“It’s important that there be an open airing of all thedifferent arguments before anyone takes any policy steps,” Novicksaid in an interview. Research in this area has “leap-frogged” athorough academic debate and is entering the realm of policy toosoon, she said.

Market share

The research is based on the theory that if an asset managerholds stakes in the major companies in one industry, it wouldprefer they all produce healthy profits rather than aggressivelycompete with each other for market share.

In the proposal from the researchers at Yale and the Universityof Chicago, institutional investors could avoid governmentlitigation by concentrating their holdings in one firm perindustry, while being allowed to invest in multiple industries, orby limiting the total value of their investment to less than 1percent of an industry.

“There is much room for debate over these complex and richissues and I salute any call or offer of data for more rigorousresearch,” Glen Weyl, visiting senior research scholar andlecturer at Yale, said by e-mail. “However, industry putting outresearch with little substance to cast doubt on respected academicfindings is rarely useful and often harmful, as seen in the debatesover climate science and the health effects of tobacco."

John C. Bogle, Vanguard’s founder, said in an interview that theresearchers haven’t looked at the “practical consequences” of theproposed ownership restrictions on some of the industry’s mostpopular investment products.

Common ownership

“Show me what the S&P 500 index fund would look like if thecommon ownership was eliminated, if you could only have one companyin an industry,” Bogle said. “It would destroy the industry”of indexing by transforming it into a business of stock-selectionand active management, he said.

The asset managers’ response shows their concern that lawmakersmay take the matter further. Already, some members of the EuropeanParliament in Brussels have questioned whether stiffer regulationsmight be needed. The German Monopolies Commission, a committee ofexperts that advises the government on competition law,called in September for more study of institutional ownershipstakes in companies in the same industry.

In the U.S., the Justice Department’s anti-trust unit hasreviewed the research and the effect of asset managers’ commonownership stakes in airlines and other industries.

The debate has emerged during a time of massive growth in thepassive and index investing business at BlackRock, Vanguard andState Street. Equity investments in index vehicles, including ETFs,accounted for about 34 percent of the $24.6 trillion of globalequity assets under management by external managers, according toBlackRock data at the end of 2015.

Minority shareholder

The academic research has centered on those asset managers’investments on behalf of clients. The three firms togetherconstitute the largest shareholder in 88 percent of companies inthe S&P 500, according to researchers at the University ofAmsterdam first published last June. A separate estimate foundBlackRock to be the largest shareholder in about a third ofcompanies in each of the FTSE 100 and DAX 30 indexes.

Novick said that big asset managers typically own less than 20percent of a company, even when their holdings are lumpedtogether.

“Any company is going to care about the other 80, 90 percent oftheir shareholders,” Novick said. “They’re not going to dosomething that they think somehow favors one versus another.”

BlackRock rejected researchers’ arguments that common ownershipdiscourages competition among companies through shareholders’ sayon executive pay. Fund managers need to be able to engage to withcompanies’ management to influence and monitor corporate governanceand represent their clients’ best interests over the long-term, thefirm said.

Senior management

Vanguard Chief Executive Officer Bill McNabb said the assetmanager’s discussions with corporate executives on compensationencourage competition.

“It’s incentivized senior management teams to perform betterthan their competitors and align incentives accordingly,” McNabbsaid in an interview. “It’s not been ‘Just do fine, just what themarket would do,’ it’s actually been, ‘Beat your competitors.”’

BlackRock also called it “flawed” thinking to suggest that assetmanagers are incentivized to discourage competition among thecompanies they invest in. Asset managers offer many funds anddifferent strategies, and “ascribing a single view on a particularsecurity to an asset manager is not supported by the reality of thebusiness,” the firm said.

“Even were the conclusions in this research found accurate, thepolicy proposals based on this literature would lead to more harmthan good,” BlackRock said. “Such changes would increase costs anddisrupt the process of saving for retirement by individuals.”

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