When Your Shareholders Invest in Your Competitors: Implications for Shareholder Payouts

Abstract

Cross-ownership or the practice of simultaneously holding the shares of competing firms has become ubiquitous. In this paper we examine how the propensity of the focal firm’s shareholders to also hold the shares of its competitors affects shareholder payouts, such as stock buybacks and dividend payments. While the majority of corporate governance research treats shareholder interests as synonymous with the interests of the firm, we draw attention to the question: What if the firm’s shareholders also invest in the firm’s competitors? We furthermore distinguish between firm-specific and industry-specific risk, and investigate the implications of the inter-industry portfolio diversification of the focal firm’s shareholders, as well as the moderating impact of the largest shareholder stake in the company. Our findings indicate that firms spend more resources on stock buybacks and dividends when the firm's shareholders have more widespread economic interests in the firm's competitors, as well as higher inter-industry portfolio diversification. The stake in the firm by its largest shareholder, however, moderates negatively these relationships.