Cross Holding

Shareholder Cross-holdings and Their Effect on Acquisition

Decisions*

Jarrad Harford

University of Washington†

Dirk Jenter

Stanford University and NBER‡

Kai Li

University of British Columbia§

First Draft: June 2006

This Version: March 2008

Abstract: We document the magnitude and determinants of institutional shareholder crossholdings. Cross-holdings are created when a shareholder of one firm holds shares in other firms

as well. We find that institutional cross-holdings have risen rapidly over the last twenty years.

Cross-holdings are higher the more alike two firms are on a number of dimensions, such as size

and performance, suggesting that institutional investing screens result in common holdings in

similar firms. Further, we examine the influence of these cross-holdings on bidder managers’

selection of acquisition targets. Some institutional investors of the bidder have large crossholdings in the target in an average acquisition, and there is a significant number of deals in

which a majority of bidder institutions does. There is strong evidence that bidder managers

consider their shareholders’ cross-holdings when choosing targets. We conclude that shareholder

cross-holdings are sizeable and, at least in the case of acquisitions, affect managerial decisions.

Keywords: cross-holdings, institutional investors, target selection, mergers and acquisitions,

toeholds

JEL classification: G30, G34

*

We thank Nittai Bergman, Murray Carlson, Alex Edmans, Adlai Fisher, Ron Giammarino, Jon Karpoff, Alan

Kraus, Kalina Manova, Gregor Matvos, Wayne Mikkelson, Pablo Moran, Hernan Ortiz-Molina, Michael Ostrovsky,

Jon Reuter, Frederik Schlingemann, Jeremy Stein, Hongping Tan, Ralph Walkling, and seminar and conference

participants at Bentley College, Boston College, the Chinese University of Hong Kong, the City University of Hong

Kong, Concordia, the Hong Kong University of Science and Technology, the MIT finance lunch, Rutgers

University, Simon Fraser...