Determinants of Intercorporate Shareholdings
31 Pages Posted: 1 Jun 2013 Last revised: 10 Aug 2017
Date Written: March 1, 1997
This paper examines why firms choose to spend resources on acquiring ownership rights in other firms. Based on a unique data base of every individual intercorporate shareholding on the Oslo Stock Exchange during the period 1980-1994, we find that such investments serve at least three functions. First, they play a role in corporate governance, as managers in firms with low insider holdings, diffuse ownership structure, and high free cash flow tend to mutually acquire equity stakes in each other, possibly in a collective attempt to protect their human capital in the market for corporate control. Second, interfirm equity holdings serve as financial slack for growing firms, reducing potential adverse selection costs by providing an internal funding source for new investments in long-term assets. Finally, our findings also suggest that intercorporate shareholdings are an integrated part of the investor's cash flow management system by being a liquidity buffer when cash inflows and cash outflows are non-synchronous.
Keywords: Corporate governance, Intercorporate shareholdings
JEL Classification: G3, G34
Suggested Citation: Suggested Citation