Research Question/Issue: This study investigates the effect of cross-shareholding on financial reporting and the information environment in the Japanese market and hypothesizes that higher cross-shareholding is related to lower contract-efficient earnings recognition and higher information asymmetry because cross-shareholding entrenches managers. Furthermore, we investigate whether managers try to maximize their self-interest or to enjoy a quiet life when they are isolated from market pressure and entrenched owing to cross-shareholding. Research Findings/Insights: Using a unique dataset on cross-shareholding among Japanese listed firms, we find that higher cross-shareholding is associated with (1) less timely loss recognition and (2) higher probability of information-based trading. Further investigation clarifies that higher cross-shareholdings are related to (3) lower absolute forecast error and (4) lower R&D expenditures. The first two findings indicate that cross-shareholding entrenches managers, and the last two findings show that entrenched managers enjoy a quiet life. Theoretical/Academic Implications: This study contributes to the corporate governance literature by providing new evidence that cross-shareholding influences financial reporting and the information environment in the market by inducing managers to become entrenched and to enjoy a quiet life. Practitioner/Policy Implications: This study provides implications for policymakers in markets in which cross-shareholding is a common ownership format. To enhance contract-efficient financial reporting and/or reduce information asymmetry in the market, it may be necessary to reduce cross-shareholding.

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