The effect of institutional cross-ownership on corporate risk-taking in a transitional economy

Abstract

This study documents the unintended effect of institutional cross-ownership on corporate risk-taking in a transitional economy. Theoretically, cross-owners can increase their influence in corporate governance through voice and exit. However, such an insight may not align with the reality of the Chinese market, where institutional activism is limited. We predict and document that the amplified exit threat of institutional cross-ownership increases its contribution to managerial myopia and reduces risk-taking activities. This effect is more pronounced for firms when the exit threat is more credible or when managers are more concerned about market performance. As expected, the association is driven primarily by active short-term investors, whose exit threat is much stronger. Our findings suggest that institutional cross-ownership may inadvertently exacerbate agency problems because, in some cases, it may discourage managers from taking value-maximizing actions.