Institutional Cross-Ownership and Corporate Strategy: The Case of Mergers and Acquisitions

Abstract

This article provides new evidence on the important role of institutional investors in affecting corporate strategy. Institutional cross-ownership between two firms not only increases the probability of them merging, but also affects the outcomes of mergers and acquisitions (M&As). Institutional cross-ownership reduces deal premiums, lowers completion probabilities of deals with negative acquirer announcement returns, and increases stock payment in M&A transactions. Furthermore, deals with high institutional cross-ownership have lower transaction costs and disclose more transparent financial statement information. The effect of cross-ownership on deal performance is mixed. Institutional cross-ownership is negatively related to acquirer announcement returns, a measure of the market perceived deal quality. However deals with high cross-ownership are more likely to be non-diversifying and independent institutional cross-ownership is positively related to deal long-run performance. Overall, our results suggest that the growth of institutional cross-holdings in U.S. stock markets may greatly change corporate strategies and decision making processes.