A THEORY OF UNWINDING OF CROSS‐SHAREHOLDING UNDER MANAGERIAL ENTRENCHMENT

Nobuyuki Isagawa

Journal of Financial Research, 2007, vol. 30, issue 2, 163-179

Abstract: In this article I examine corporate strategies regarding cross‐shareholding and the unwinding of cross‐shareholding, and I present a rationale for corporate managers to unwind cross‐shareholding from the perspective of managerial entrenchment. Although cross‐shareholding enhances managerial entrenchment, the increased agency costs associated with managerial opportunism increase the incentives for a hostile takeover. 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 because of financial market deregulation.

Date: 2007
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