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A Theory Of Unwinding Of Cross-Shareholding Under Managerial Entrenchment

  • Nobuyuki Isagawa
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    In this article I examine corporate strategies regarding cross-shareholding and the unwinding of cross-shareholding, and I present a rationale for corporate managers to unwind cross-shareholding from the perspective of managerial entrenchment. Although cross-shareholding enhances managerial entrenchment, the increased agency costs associated with managerial opportunism increase the incentives for a hostile takeover. To avoid a takeover, managers have to unwind cross-shareholdings. The unwinding of cross-shareholdings implies that managers will relinquish their entrenchment and thus will act to increase shareholders' wealth in the future. The model proposed here explains why cross-shareholdings among Japanese firms declined during the 1990s, a decade during which the cost of takeovers decreased because of financial market deregulation. 2007 The Southern Finance Association and the Southwestern Finance Association.

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    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 30 (2007)
    Issue (Month): 2 ()
    Pages: 163-179

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    Handle: RePEc:bla:jfnres:v:30:y:2007:i:2:p:163-179
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