Cross ownership is reinforcing business relationships by owning stock in the companies which a given company does business.
Some countries where cross ownership of shares is followed:
Positives of cross ownership:
- Closely ties each business to the economic destiny of its business partners
- Promotes a slow rate of economic change
Cross ownership of shares is critizied for:
- Stagnating the economy
- Wasting capital that could be used to improve productivity
- Expanding economic downturns by preventing reallocation of capital
A major factor in cross ownership of shares is a high capital gains tax rate. A company has less incentive to sell cross owned shares if taxes are high because of the immediate reduction in the value of the assets.
For example, a company owns $1000 of stock in another company that was originally purchased for $200. If the capital gains tax rate is 50% (like Germany) and the company sells the stock, the company has $600 which is 40 percent less than before it sold the stock.
Long term cross ownership of shares combined with a high capital tax rate greatly increases periods of asset deflation both in time and in severity.