Managing Ownership by Management

This paper describes a previously undocumented internal market for corporate control. It is utilized in Japan where purchases and sales of blocks of shares are organized by the management of firms themselves. The paper records how Japanese companies have undertaken repurchases that are held in treasury stock and subsequently placed with other companies. Japanese management has a long history of engaging in such practices and the cross-shareholdings that resulted were defensive in nature and value destructive. However, they have recently taken on a very different form: in contrast to traditional cross-shareholdings, they are now inter-corporate holdings that are strategic and on average value enhancing. The change has resulted from the growing presence of international institutional investors and improved corporate governance. It suggests that, when subject to external market discipline, internal management of ownership can be used to promote value enhancing outcomes. This raises the question of whether there is a greater degree of managerial influence on ownership elsewhere than is currently recognized. We discuss this in the context of dominant forms of dispersed and family ownership observed around the world.