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Optimal Cross Holding with Externalities and Strategic Interactions

Author

Listed:
  • 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.

Suggested Citation

  • Matthew J. Clayton & Bjorn N. Jorgensen, 2005. "Optimal Cross Holding with Externalities and Strategic Interactions," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1505-1522, July.
  • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:4:p:1505-1522
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Heiko Karle & Tobias J. Klein & Konrad O. Stahl, 2011. "Ownership and Control in a Competitive Industry," CESifo Working Paper Series 3380, CESifo Group Munich.
    2. Mathews, Richmond D., 2006. "Strategic alliances, equity stakes, and entry deterrence," Journal of Financial Economics, Elsevier, vol. 80(1), pages 35-79, April.
    3. Yasuhiro Arikawa & Atsushi Kato, 2015. "Cross Shareholding and Initiative Effects," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(2), pages 305-319, February.
    4. Chou, Ting-Kai & Ou, Chin-Shyh & Tsai, Shu-Huan, 2014. "Value of strategic alliances: Evidence from the bond market," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 42-59.
    5. Azar, José & Schmalz, Martin & Tecu, Isabel, 2017. "Anti-Competitive Effects of Common Ownership," IESE Research Papers D/1169, IESE Business School.
    6. Jean-Daniel Guigou & Patrick De Lamirande & Bruno Lovat, 2011. "Strategic delegation and collusion: Do incentive schemes matter?," LSF Research Working Paper Series 11-02, Luxembourg School of Finance, University of Luxembourg.
    7. Li, Sanxi & Ma, Hongkun & Zeng, Chenhang, 2015. "Passive cross holding as a strategic entry deterrence," Economics Letters, Elsevier, vol. 134(C), pages 37-40.
    8. 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.
    9. repec:spr:epolin:v:44:y:2017:i:3:d:10.1007_s40812-016-0053-6 is not listed on IDEAS
    10. Clayton, Matthew J., 2009. "Debt, investment, and product market competition: A note on the limited liability effect," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 694-700, April.
    11. 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, vol. 30(6), pages 735-747.
    12. Clayton, Matthew J. & Jorgensen, Bjorn N., 2011. "Corporate equity ownership, investment, and product market relationships," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1377-1388.

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