How cross‐shareholding influences financial reporting: Evidence from Japan

Abstract

Abstract Research Question/Issue This study investigates the effect of cross‐shareholding on financial reporting and the information environment in the Japanese market and hypothesizes that higher cross‐shareholding is related to lower contract‐efficient earnings recognition and higher information asymmetry because cross‐shareholding entrenches managers. Furthermore, we investigate whether managers try to maximize their self‐interest or to enjoy a quiet life when they are isolated from market pressure and entrenched owing to cross‐shareholding. Research Findings/Insights Using a unique dataset on cross‐shareholding among Japanese listed firms, we find that higher cross‐shareholding is associated with (1) less timely loss recognition and (2) higher probability of information‐based trading. Further investigation clarifies that higher cross‐shareholdings are related to (3) lower absolute forecast error and (4) lower R&D expenditures. The first two findings indicate that cross‐shareholding entrenches managers, and the last two findings show that entrenched managers enjoy a quiet life. Theoretical/Academic Implications This study contributes to the corporate governance literature by providing new evidence that cross‐shareholding influences financial reporting and the information environment in the market by inducing managers to become entrenched and to enjoy a quiet life. Practitioner/Policy Implications This study provides implications for policymakers in markets in which cross‐shareholding is a common ownership format. To enhance contract‐efficient financial reporting and/or reduce information asymmetry in the market, it may be necessary to reduce cross‐shareholding.

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