This paper investigates the relationship between corporate block ownership and firm leverage. Corporate blockholders – nonfinancial firms who hold more than five percent equity in another industrial corporation − can affect a firm’s policies through their business relationships, monitoring, or through expropriation. By examining the evolution of corporate block ownership after block formation, I find that corporate block ownership is negatively related to firm leverage in fixed-effects and dynamic GMM regressions. In addition, corporate blockholders often obtain board seats, indicating that corporate investors are actively involved in governance activities. Furthermore, the negative relationship between corporate blocks and leverage becomes stronger when corporate blockholders have more board representation on the target firm, when the firm has higher agency costs, and when there is no product market relationship between corporate blockholders and the firm. Overall, my findings suggest that corporate blockholders play an important monitoring role in firm policies and can substitute for other monitoring mechanisms including leverage and institutional investors
