RIETI Report November 2008

Revisiting the Issue of Cross-Shareholding

The global financial crisis is similar to a hurricane that has been battering banks and financial institutions offshore, but is now bearing down on the mainland and the mainstream economy. One of the earliest spillover effects of the global financial crisis was its ability to disrupt the commercial paper (CP) market that mostly nonfinancial institutions had come to rely upon to meet their short-term liquidity and funding needs. Now corporations do not risk holding another company's paper due to liquidity constraints and a lack of trust stemming from not knowing what may be hidden on the balance sheets of CP issuers. Could this situation have been avoided?

In this month's featured article in the RIETI Report, Professor OSANO Hiroshi points out in his contribution to Developing the Research Frontier in Corporate Governance Analysis - "Revisiting the Issue of Cross-Shareholding" - that Japanese firms have long maintained cross-shareholding relationships in which publicly traded corporations invest in the shares of strategic partners, competitors, and affiliated firms operating in unrelated industries. Had these relationships been in place among a greater number of U.S. and European firms, would the CP markets have fared better? It is uncertain to say, but cross-shareholding relationships may be something Western corporations should consider as they attempt to navigate the storm approaching and protect themselves from future storms that may be forming offshore.

Revisiting the Issue of Cross-Shareholding

(From "Developing the Research Frontier in Corporate Governance Analysis")

OSANO Hiroshi
Professor, Institute of Economic Research, Kyoto University

Three patterns of partial ownership

The pros and cons of cross-shareholding among Japanese companies have been hotly debated recently in the context of their role as a defense against hostile takeovers. Partial ownership is an arrangement in which a nonfinancial company (hereinafter referred to simply as "company") holds a portion of shares in another company. The practice, however, is not unique to Japanese companies and can be observed in countries throughout the world, including the United States.

There are three patterns of partial ownership:
1) Mutual or unilateral shareholding between companies in a strategic partnership. This type of partial ownership is typically observed in cases where one company supplies products or services to the other and, in that context, can be defined as "vertical partial ownership."
2) Mutual or unilateral shareholding between companies in a competitive relationship in the same industry. This type of partial ownership concerns companies that compete with each other within the same industry and can be defined as "horizontal partial ownership."
3) Mutual or unilateral shareholding between companies having no or only a minimal business relationship between one another. This type of partial ownership concerns companies that are respectively engaged in business unrelated to that of the other, and can be defined as "conglomerate partial ownership."

Cases of partial ownership

Now, take a look at some specific cases for each of the three types of partial ownership.

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