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A THEORY OF UNWINDING OF CROSS-SHAREHOLDING UNDER MANAGERIAL ENTRENCHMENT

Authors


  • The author would like to thank Walter Novaes, Shigeki Sakakibara, Taiji Baba, Kenya Fujiwara, Michael Rebello (the referee), and seminar participants at Kobe University and Osaka University for their helpful comments. This research was supported by the Japan Securities Scholarship Foundation and a Grant-in-Aid for Science Research from the Ministry of Education, Science, and Culture.

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.

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