Technical Report Cross-Shareholdings and Information EnvironmentMuramiya

Muramiya, Katsuhiko  ,  Takada, Tomomi

15-20pp.1 - 26 , 2015-06 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
We examine the relationship between cross-shareholdings and the information environment. This issue is important because the separation of ownership and control allows managers to act exclusively in their own interests. Despite numerous studies on the influences of other types of ownership structures, including family, institutional investor, and block ownership structures, little is known about how cross-shareholdings influence management incentives. We highlight the Japanese market, where cross-shareholding is historically one of the prominent ownership structures. Using a unique database detailing the level of cross-shareholdings, we find that higher cross-shareholdings relate to (1) greater information asymmetry in the market, (2) higher earnings quality, and (3) lower firm value. The results are consistent with the quiet life hypothesis, which predicts management avoids difficult decisions and costly actions when isolated from market pressures.

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