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Optimal Cross Holding with Externalities and Strategic Interactions

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Author Info

  • Matthew J. Clayton

    (Rutgers Business School Newark and New Brunswick, Rutgers University)

  • Bjorn N. Jorgensen

    (Graduate School of Business, Columbia University)

Abstract

We analyze a two period setting where firms first choose equity positions in each other and second engage in operating activities that cause externalities. Firms facing positive externalities optimally choose long equity positions to increase their profits. Firms facing negative externalities encounter a prisoners' dilemma, where each firm optimally chooses short positions in the first period, committing to a more aggressive operating stance that results in lower profits. In contrast to the prior literature, regulation restricting cross holdings reduces consumer surplus and economic welfare when the number of firms is fixed. However, such regulation can increase entry, improving net welfare.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 78 (2005)
Issue (Month): 4 (July)
Pages: 1505-1522

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Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:4:p:1505-1522

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. Karle, Heiko & Klein, Tobias & Stahl, Konrad O, 2011. "Ownership and Control in a Competitive Industry," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8277, C.E.P.R. Discussion Papers.
  2. M. Kopel & L. Lambertini, 2012. "On the (non) existence of a price equilibrium in delegation games with relative performance compensation," Working Papers wp807, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Chou, Ting-Kai & Ou, Chin-Shyh & Tsai, Shu-Huan, 2014. "Value of strategic alliances: Evidence from the bond market," Journal of Banking & Finance, Elsevier, Elsevier, vol. 42(C), pages 42-59.
  4. Clayton, Matthew J., 2009. "Debt, investment, and product market competition: A note on the limited liability effect," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(4), pages 694-700, April.
  5. Jean-Daniel Guigou & Patrick De Lamirande & Bruno Lovat, 2011. "Strategic delegation and collusion: Do incentive schemes matter?," LSF Research Working Paper Series, Luxembourg School of Finance, University of Luxembourg 11-02, Luxembourg School of Finance, University of Luxembourg.
  6. Mathews, Richmond D., 2006. "Strategic alliances, equity stakes, and entry deterrence," Journal of Financial Economics, Elsevier, Elsevier, vol. 80(1), pages 35-79, April.
  7. Goetz, Christopher F. & Shapiro, Adam Hale, 2012. "Strategic alliance as a response to the threat of entry: Evidence from airline codesharing," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 30(6), pages 735-747.

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