A cross holding is a security issue by a publicly listed company that is held by another company on the same listing. If the cross holding is not accounted for when determining the values of companies on the exchange, the result can be a double counting of the security's value, which would obscure the true value of the companies involved. It is also important to consider the role of cross holdings in situations like corporate takeovers and ousters of management. A company that holds shares in another can vote just like any other shareholder.
In the most simple example of a cross holding, Company X can hold stocks or bonds issued by Company Y. Company Y's value would be counted twice if the cross holding was not accounted for. It would be counted once when looking at the value of securities issued by the company, and again when considering the securities held by Company X. This would lead to having skewed information about the values of companies on the index.
It is also possible for companies to hold shares in each other and to hold securities issued by multiple companies. A tangled web of cross holdings can be created on a securities index by companies making diverse investments in order to maximize the potential for returns. The more cross holdings there are, the more challenging it becomes to value companies accurately.
People who specialize in evaluating companies listed on public exchanges can use a variety of techniques to account for cross holding situations, so that their valuations are correct and helpful. The use of computer systems has greatly enhanced the ability to address cross holdings. Computers can store information about the securities held by various public companies and this information can be cross referenced to ensure that securities are not accidentally valued twice when looking at the value of an exchange or a sector within the exchange.
For companies that purchase securities issues, securities can be a way to diversify investments and reduce the risks of investments. Companies can also strategically purchase shares in each other for the purpose of influencing decisions or getting into a favorable position for a takeover or similar action. Keeping a close eye on the distribution of a company's investments can reveal information about the company's future plans and the direction that company may be moving in. Market analysts, investors, and many others are interested in tracking corporate investments to monitor the market with the goal of avoiding unpleasant surprises.