Reciprocal Shareholding and Takeover Deterrence

Reciprocal shareholding has been argued to increase managerial power and facilitate takeover resistance. The latter may translate into higher premiums in the event of an actual takeover, thus benefiting shareholders, whereas increased influence over board decisions induces too high managerial compensation. The net effect is determined by the efficiency of the incumbent management relative to outside entrepreneurs. If the probability of receiving a tender offer is high, shareholders are likely to benefit from crosswise shareholdings. While symmetric increases in crosswise shareholdings unambiguously make takeovers more difficult, it is not true' that the effect on managerial compensation is always positive. The remuneration can be shown to be initially increasing but eventually it will decrease, approaching a lower bound.