Cross-Shareholding, Returns and Entrenchment Behaviour Among Japanese Firms, 1990-2008

Abstract

This paper is concerned with the nature of ownership, returns and corporate performance and investment behavior in the ‘post-bubble’ environment surrounding Japanese firms. Market participants have feared that ‘unwinding’ of cross-shareholding would have negative consequences for returns, on the assumption of a downward sloping demand curve for equities. We examine whether this is the case, but more importantly consider what consequences the changing nature of ownership might have for firm behavior. Interestingly, while overall unwinding of cross-holdings is indeed consistent with downward sloping demand curves for equities, controlling for endogeneity biases and focusing on holdings by financial institutions, we find the opposite result. We interpret this as evidence that at least one facet of the traditional ‘main-bank system’ of Japan is alive and well- namely that increased bank holdings can be viewed as intervention by banks in assistance of financially distressed firms. In terms of firm behavior, our results are consistent with the literature on entrenchment. That is, firms that are more closely cross-held by other firms (financial or non-financial) tend to invest more heavily in capital stock and research and development. This is consistent with the notion that firms that are less vulnerable to takeover tend to spend and invest more than their more takeover prone counterparts.