Company Cross-Holdings and Investment Analysis

Some analysts have suggested that the prevalence of cross-holdings leads to a significant distortion in aggregate market capitalizations. Moreover, equity investors and creditors are advised to undo the effects of these distortions when analyzing companies in markets where cross-holdings are common. The analysis here shows that for most equity investment decisions, undoing the effects of cross-holdings is inappropriate. Furthermore, cross-holdings do increase the debt-bearing capacity of firms and should not be entirely eliminated during credit analysis. Finally, empire building is unlikely to be the primary reason for cross-holdings.