Cross ownership

Cross ownership is a method of reinforcing business relationships by owning stock in the companies with which a given company does business.

Some countries where cross ownership of shares is a major part of the business culture are:

• Japan
• Germany

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 criticized 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 perpetuating 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.