What is Cross Holding

Cross holding is a situation in which a publicly traded corporation owns stock in another publicly traded company. So, technically, listed corporations own securities issued by other listed corporations. Cross holding can lead to double counting, whereby the equity of each company is counted twice when determining value. When double counting occurs, the security's value is counted twice, which can result in estimating the wrong value of the two companies.

BREAKING DOWN Cross Holding

Companies that have cross holdings are susceptible to confusion and management holdout in cases of company mergers and acquisitions because one company might refuse consent to the other, and vice versa. Also, if Company A holds stocks or bonds in Company B, the value of this security might be counted twice, in error, because these securities would be counted when determining the value of the company issuing the security, and again when looking over the securities held by the other company.

Markets in Britain and the United States have long enjoyed capitalism marked by a dispersed base of owners. In continental Europe, by contrast, ownership tends to be concentrated among a tight unit of insiders. The reasons differ from country to country. In France, it’s a combination of the state's wish to see big business in friendly hands and the lack of institutional investors. Elsewhere, savvy dealing with dynasties such as Sweden's Wallenbergs and Italy's Agnellis has played a bigger role. Until recently, it was difficult to know just how closely held Europe's companies were, because disclosure standards were lax. New and tougher standards, are making things clearer.

In Japan, the keiretsu is a long-standing tradition of companies with interlocking business relationships and shareholdings. As an informal business group, members companies own small portions of the shares in each other's companies. This system helps insulate each company from stock market fluctuations and takeover attempts, thus enabling long-term planning in projects.

Critics contend the practice of building cross or “strategic” shareholdings between listed corporations contributes significantly to the docility of shareholder registers, the complacency of failing management teams and the difficulty of building real momentum behind the push for better stewardship and corporate governance.

Shareholders pushing for improved corporate governance standards are increasingly asking for more detailed outlines of the economic rationale for cross-holdings.