Cross-Shareholding and Unwinding of Cross-Shareholding under Managerial Entrenchment


This paper examines corporate strategies regarding cross-shareholding and the unwinding of cross-shareholding, and presents a rationale for corporate managers to unwind cross-shareholding from the perspective of managerial entrenchment. While cross-shareholding enhances managerial entrenchment, the increased agency costs associated with managerial opportunism increase the incentives for a hostile takeover. In order to avoid a takeover, managers have to unwind cross-shareholdings. The unwinding of cross-shareholdings implies that managers will relinquish their entrenchment, and thus will act to increase shareholders’ wealth in the future. The model proposed here explains why cross-shareholdings among Japanese firms declined during the 1990s, a decade during which the cost of takeovers decreased due to financial market deregulation.

JEL Classification: G32, G34

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