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Institutional cross-ownership and corporate strategy: The case of mergers and acquisitions

Chris Brooks, Zhong Chen and Yeqin Zeng

Journal of Corporate Finance, 2018, vol. 48, issue C, 187-216

Abstract: This article provides new evidence on the important role of institutional investors in affecting corporate strategy. Institutional cross-ownership between two firms not only increases the probability of them merging, but also affects the outcomes of mergers and acquisitions (M&As). Institutional cross-ownership reduces deal premiums, increases stock payment in M&A transactions, and lowers the completion probabilities of deals with negative acquirer announcement returns. Furthermore, deals with high institutional cross-ownership have lower transaction costs and disclose more transparent financial statement information. The effect of cross-ownership on the total deal synergies and post-deal long-term performance is positive, which can be attributed to independent and non-transient cross-owners. Our findings are robust after mitigating the cross-ownership asymmetry concern. Overall, our results suggest that the growth of institutional cross-holdings in U.S. stock markets may greatly change corporate strategies and decision-making processes.

Keywords: Institutional investors; Cross-ownership; Mergers and acquisitions (M&As) (search for similar items in EconPapers)
JEL-codes: G23 G30 G34 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.jcorpfin.2017.11.003

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Handle: RePEc:eee:corfin:v:48:y:2018:i:c:p:187-216