Cross ownership is a method of reinforcing business relationships by owning stock in the companies with which a given company does business. Heavy cross ownership is referred to as circular ownership.
In the US, "cross ownership" also refers to a type of investment in different mass-media properties in one market.
Cross ownership of stock
Some countries where cross ownership of shares is a major part of the business culture are:
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 25% (like Germany) and the company sells the stock, the company has $800 which is 20 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.
Media cross ownership
Cross ownership also refers to a type of media ownership in which one type of communications (say a newspaper) owns or is the sister company of another type of medium (such as a radio or TV station). One example is The New York Times 's former ownership of WQXR Radio and the Chicago Tribune's similar relationship with WGN Radio (WGN-AM) and Television (WGN-TV).
The Federal Communications Commission generally does not allow cross ownership, to keep from one license holder having too much local media ownership, unless the license holder obtains a waiver, such as News Corporation and the Tribune Company have in New York.