Vertical Cross-Shareholding: Theory and Experimental Evidence
Posted: 21 Dec 2006
This paper analyzes vertical cross-shareholding, that is, the mutual holding of a minority of shares between vertically related firms. First, we explore the issue in a game-theoretic model and show that cross-shareholding is sufficient to obtain efficient outcomes. We then test the model's predictions in an experiment. Theory predicts the seller decisions accurately but the buyer decisions only to a small extent. Buyers are more likely to agree on cross-shareholding than sellers in an attempt to avoid the winner's curse. Cross-shareholding occurs more frequently than predicted, and it increases the likelihood of trade.
Keywords: cross-shareholding, winner's curse, experiments, vertical merger
JEL Classification: L22, L25, L40
Suggested Citation: Suggested Citation