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Institutional cross-holdings and their effect on acquisition decisions

Jarrad Harford (), Dirk Jenter () and Kai Li ()

Journal of Financial Economics, 2011, vol. 99, issue 1, 27-39

Abstract: Cross-holdings are created when a shareholder of one firm holds shares in other firms as well, and cross-holdings alter shareholder preferences over corporate decisions that affect those other firms. Prior evidence suggests that such cross-holdings explain the puzzle of why shareholders allow acquisitions that reduce the value of the bidder. Conducting a shareholder-level analysis of cross-holdings, we instead find that cross-holdings are too small to matter in most acquisitions and that bidders do not bid more aggressively even in the few cases in which cross-holdings are large. We conclude that cross-holdings do not explain value-reducing acquisitions. Beyond acquisitions, we find that institutional cross-holdings between large firms have, in fact, increased rapidly over the last 20 years, but mostly due to indexing and quasi-indexing. As in acquisitions, cross-holdings by active investors are typically too small to matter.

Keywords: Cross-holdings; Institutional; investors; Mergers; and; acquisitions; Shareholder; preferences; Value-reducing; acquisitions (search for similar items in EconPapers)
Date: 2011
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Handle: RePEc:eee:jfinec:v:99:y:2011:i:1:p:27-39