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European Finance Review 1: 265–287, 1997. c 1997 Kluwer Academic Publishers. Printed in the Netherlands. Determinants of Intercorporate Shareholdings  ØYVIND BØHREN1 and ØYVIND NORLI2 1Norwegian School of Management, Elias Smiths vei 15, N-1300 Sandvika, Norway; 2Norwegian School of Economics and Business Administration, Helleveien 30, N-5035 Bergen-Sandviken, Norway and Norwegian School of Management, Elias Smiths vei 15, N-1300 Sandvika, Norway Abstract. This paper examines why firms choose to spend resources on acquiring ownership rights in other firms. Based on a unique data base of every individual intercorporate shareholding on the Oslo Stock Exchange during the period 1980–1994, we find that such investments serve at least three functions. First, they play a role incorporate governance, as managers in firms with low insider holdings, diffuse ownership structure and high free cash flow tend to mutually acquire equity stakes in each other, possibly in a collective attempt to protect their human capital in the market for corporate control. Second, interfirm equity holdings serve as financial slack for growing firms, reducing potential adverse selection costs by providing an internal funding source for new investments in long-term assets. Finally, our findings also suggest that intercorporate shareholdings are an integrated part of the investor’s cash flow management system by being a liquidity buffer when cash inflows and cash outflows are non-synchronous. 1. Introduction Intercorporate shareholding is a pervasive international phenomenon. According to recent estimates in 17 countries, its aggregate size is on average remarkably large but also quite variable across national markets. For instance, the ratio of intercorporate share value to total equity capitalization among listed firms is about 50% in Japan, 25% in Sweden, 15% in Norway, 10% in Spain, 1% in the U.S. and virtually zero in the U.K.1 The