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Profits of horizontally interrelated firms with dividend obligations


  • Umed Temurshoev


Purpose - The purpose of this paper is to solve the problem of overestimation of industry profits due to the presence of cross-shareholding (CS) links among firms that is inherent to the profit formulations in existing literature. Design/methodology/approach - In proposing a new profits specification, we explicitly distinguish between firms' profits (retained earnings) and their external shareholders' returns. Matrix algebra is used to take into full account both direct and indirect financial interests of firms in each other. Findings - Compared to no the CS case, with CS firms' industry-wide retained earnings increase, while aggregate external shareholders' returns decrease unless dividend ratios are all unity. It is shown that qualitatively there is no difference in the outcomes of all profit specifications, whereas there is a quantitative difference. Research limitations/implications - The pattern of CS is taken as exogenous, which looks at the problem from an antitrust perspective. Endogenizing the structure of CS is left for future research. Practical implications - Firms have incentives to engage in CS links, since they can only benefit from it. In empirical research (e.g. analyzing market performance) dividend payments have to be taken into account if there are extensive CS links present in the industry under study. Originality/value - This paper extends the existing profit formulations by including both income inflows and outflows of firms due to CS links. Furthermore, the significance of considering dividend payments for empirical research is discussed.

Suggested Citation

  • Umed Temurshoev, 2009. "Profits of horizontally interrelated firms with dividend obligations," Journal of Economic Studies, Emerald Group Publishing, vol. 36(3), pages 296-306, July.
  • Handle: RePEc:eme:jespps:v:36:y:2009:i:3:p:296-306

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    References listed on IDEAS

    1. Engle, Robert F. & Patton, Andrew J., 2004. "Impacts of trades in an error-correction model of quote prices," Journal of Financial Markets, Elsevier, vol. 7(1), pages 1-25, January.
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    3. Gemmill, Gordon, 1996. " Transparency and Liquidity: A Study of Block Trades on the London Stock Exchange under Different Publication Rules," Journal of Finance, American Finance Association, vol. 51(5), pages 1765-1790, December.
    4. Heflin, Frank & Shaw, Kenneth W., 2000. "Blockholder Ownership and Market Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 621-633, December.
    5. Keim, Donald B & Madhaven, Ananth, 1996. "The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 1-36.
    6. Lease, Ronald C & Masulis, Ronald W & Page, John R, 1991. " An Investigation of Market Microstructure Impacts on Event Study Returns," Journal of Finance, American Finance Association, vol. 46(4), pages 1523-1536, September.
    7. Jennifer S. Conrad, 2001. "Institutional Trading and Soft Dollars," Journal of Finance, American Finance Association, vol. 56(1), pages 397-416, February.
    8. Ellis, Katrina & Michaely, Roni & O'Hara, Maureen, 2000. "The Accuracy of Trade Classification Rules: Evidence from Nasdaq," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 529-551, December.
    9. Harris, Lawrence, 1989. "A Day-End Transaction Price Anomaly," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(01), pages 29-45, March.
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    Shares; Profit; Dividends;


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