Negotiated Block Trades and Corporate Control

Abstract

We identify negotiated trades of large-percentage blocks of stock as corporate control transactions involving active investors. One year after a trade, stock prices of the firms whose shares are traded are 5.6% higher, and 45% of the chief executives have been replaced. Stock-price increases are larger when a firm performs poorly before the trade, and when management does not resist the blockholder. Even though such blocks often convey the right to choose managers and influence corporate policy, some blockholders eventually acquire the firm, suggesting that corporate control is broader than the right to choose managers.

Blockholder ownership: Effects on firm value in market and control based governance systems

“…No systematic relationship Holderness andSheehan (1985, 1989) Eckbo and Smith (1998) Lewellen et al (1985) Positive effect Agrawal and Mandelker (1990) Renneborg (2000) Barclay and Holderness (1991, 1992) Bethel et al (1998 Negative effect Song and Walking (1993) Slovin and Sushka (1993) These studies use different ownership measures (blockholder ownership, officer and director ownership, insider ownership, share of largest owner, share of two largest owners, closely held shares, and the Herfindahl Index of Ownership Concentration). equation models can help overcome this problem, but lack of reliable instrument variables that influence either ownership or performance without influencing the other is a serious obstacle to uncovering the causal relationship between them in cross-sectional data (Himmelberg et al, 1999).…”

Private placements and managerial entrenchment

“…Some fit the model of corporations interacting with other corporations (Allen and Phillips, 2000); others are more akin to the model of active large-percentage individual shareholders who obtain their blocks from other shareholders (Barclay and Holderness, 1991). Among the three proposed hypotheses for private placements, these placements fit best within the monitoring hypothesis (Wruck, 1989).…”

Marketability, control, and the pricing of block shares

“…If share prices do not fully reflect the firm value improvement on the announcement day of the block transfer, cross-sectional differences in the block price relative to market price should reflect differences in changes in firm value due to the transfer. Barclay and Holderness (1991) suggest that the specific skills and expertise of block holders are important determinant of firm value. If the block is transferred from the government or a state-owned company to the hands of a non-government-related corporate institution (transaction type 3 and 6 in Table 2), we consider it as privatization and assume that there will be more improvement in corporate governance and firm value and hence a higher price.…”