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The purpose of this paper is to solve the problem of overestimation of industry profits due to the presence of cross‐shareholding (CS) links among firms that is inherent to the profit formulations in existing literature.

In proposing a new profits specification, we explicitly distinguish between firms' profits (retained earnings) and their external shareholders' returns. Matrix algebra is used to take into full account both direct and indirect financial interests of firms in each other.

Compared to no the CS case, with CS firms' industry‐wide retained earnings increase, while aggregate external shareholders' returns decrease unless dividend ratios are all unity. It is shown that qualitatively there is no difference in the outcomes of all profit specifications, whereas there is a quantitative difference.

The pattern of CS is taken as exogenous, which looks at the problem from an antitrust perspective. Endogenizing the structure of CS is left for future research.

Firms have incentives to engage in CS links, since they can only benefit from it. In empirical research (e.g. analyzing market performance) dividend payments have to be taken into account if there are extensive CS links present in the industry under study.

This paper extends the existing profit formulations by including both income inflows and outflows of firms due to CS links. Furthermore, the significance of considering dividend payments for empirical research is discussed.