Determinants of Intercorporate Shareholdings

This paper examines why firms choose to spend resources on acquiring ownership rights in other firms. Based on a unique data base of every individual intercorporate shareholding on the Oslo Stock Exchange during the period 1980-1994, we find that such investments serve at least three functions. First, they play a role in corporate governance, as managers in firms with low insider holdings, diffuse ownership structure, and high free cash flow tend to mutually acquire equity stakes in each other, possibly in a collective attempt to protect their human capital in the market for corporate control. Second, interfi rm equity holdings serve as financial slack for growing firms, reducing potential adverse selection costs by providing an internal funding source for new investments in long-term assets. Finally, our findings also suggest that intercorporate shareholdings are an integrated part of the investor's cash flow management system by being a liquidity buff er when cash inflows and cash outflows are non-synchronous