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Cross-Ownership: A Device for Management Entrenchment?

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  • Marc Levy
  • Ariane Szafarz

Abstract

By artificially inflating capital and creating own shares, cross-ownership can be a key device for managerial entrenchment. This article proposes a game-theoretical method to measure the extent of shareholder expropriation through cross-ownership. By properly accounting for cross-ownership linkages, we show how managers can seize indirect voting rights, and so insulate their firms from outside control. Significant examples of cross-ownership are found not only in civil law countries, but also in the US mutual fund industry. We apply our method to Germany’s Allianz Group. This article paves the way to better regulatory appraisal of management entrenchment through cross-ownership.

Suggested Citation

  • Marc Levy & Ariane Szafarz, 2017. "Cross-Ownership: A Device for Management Entrenchment?," Review of Finance, European Finance Association, vol. 21(4), pages 1675-1699.
    • Handle: RePEc:oup:revfin:v:21:y:2017:i:4:p:1675-1699.
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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions

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