| 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:
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.
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