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Institutional cross-holdings and their effect on acquisition decisions

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Author Info

  • Harford, Jarrad
  • Jenter, Dirk
  • Li, Kai

Abstract

Cross-holdings are created when a shareholder of one firm holds shares in other firms as well, and cross-holdings alter shareholder preferences over corporate decisions that affect those other firms. Prior evidence suggests that such cross-holdings explain the puzzle of why shareholders allow acquisitions that reduce the value of the bidder. Conducting a shareholder-level analysis of cross-holdings, we instead find that cross-holdings are too small to matter in most acquisitions and that bidders do not bid more aggressively even in the few cases in which cross-holdings are large. We conclude that cross-holdings do not explain value-reducing acquisitions. Beyond acquisitions, we find that institutional cross-holdings between large firms have, in fact, increased rapidly over the last 20 years, but mostly due to indexing and quasi-indexing. As in acquisitions, cross-holdings by active investors are typically too small to matter.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 99 (2011)
Issue (Month): 1 (January)
Pages: 27-39

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Handle: RePEc:eee:jfinec:v:99:y:2011:i:1:p:27-39

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Cross-holdings Institutional investors Mergers and acquisitions Shareholder preferences Value-reducing acquisitions;

References

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  1. Hansen, Robert G. & Lott, John R., 1996. "Externalities and Corporate Objectives in a World with Diversified Shareholder/Consumers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 43-68, March.
  2. Paul A. Gompers & Andrew Metrick, 1998. "Institutional Investors and Equity Prices," NBER Working Papers 6723, National Bureau of Economic Research, Inc.
  3. Palepu, Krishna G., 1986. "Predicting takeover targets : A methodological and empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 8(1), pages 3-35, March.
  4. Matvos, Gregor & Ostrovsky, Michael, 2008. "Cross-ownership, returns, and voting in mergers," Journal of Financial Economics, Elsevier, vol. 89(3), pages 391-403, September.
  5. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May.
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Cited by:
  1. Dirk Jenter & Katharina Lewellen, 2011. "CEO Preferences and Acquisitions," CESifo Working Paper Series 3681, CESifo Group Munich.

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