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

Nobuyuki Isagawa
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Nobuyuki Isagawa: Graduate School of Business Administration, Kobe University

No 2006-02, Discussion Papers from Kobe University, Graduate School of Business Administration

Abstract: 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-codes: G32 G34 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006-02
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