The Unwinding of Cross-shareholding: Causes, Effects, and Implications

Considering that the ownership structure of Japanese corporations has changed dramatically in the 1990s, this paper address a series of question related to these changes. Why is cross-shareholding, which has been in place for almost three decades, now beginning to unwind (and the mechanisms of the unwinding)? What explains the increasing diversity in the patterns of cross-shareholding among Japanese firms? Lastly what are the implications of the changing ownership structure on firm performance? Using the detailed and comprehensive data on ownership structure including individual cross-shareholding relationship and other variable (Tobin's q) developed by Nissai Life Insurance Research Institute and Waseda University, we highlight the determinants of the choice between holding or selling shares for both banks and firms. We show that profitable firms with easy access to capital markets and high foreign ownership prior to the banking crisis tend to unwind cross-shareholdings, while low-profit firms with difficulty accessing capital markets and low foreign ownership in the early 1990s tend to keep the cross shareholding with banks. For the effect of changing ownership structure on performance, we show that high instituitional shareholding and, somehow surprisingly, block shareholding of corporation have positive effect on firms performance, while the bank ownership had consistently have negative effect on firm performance since the middle of 1980s. Through these findings, we provide some policy implication and perspective on future ownership structure in Japanese firms.