Negotiated Block Trades and Corporate Control

Abstract

We identify negotiated trades of large-percentage blocks of stock as corporate control transactions. When a block trades and the firm is not fully acquired, cumulative abnormal returns average 5.6%, and 33% of the chief executives are replaced within a year. Stock-price increases are larger when control passes to the new blockholder, when management does not resist the blockholder's effort to influence corporate policy, and when the block purchaser eventually fully acquires the firm. These findings suggest that the specific skills and expertise of blockholders, and not just the concentration of ownership, are important determinants of firm value. WE EXAMINE 106 NEGOTIATED trades of at least 5% of the common stock of New York Stock Exchange (NYSE)- and American Stock Exchange (AMEX)listed corporations. Our primary objective is to assess the impact of these transactions on the firms whose shares are traded. We also investigate the importance of active block investor's specific managerial expertise and incentives for firm value. The emerging literature on concentrated ownership focuses on how the level of ownership affects a blockholder's incentives to undertake a variety of corporate decisions. Although it has been recognized that a blockholder's identity also can be important, less attention has been paid to this issue. Several recent, studies, however, provide evidence that blockholders' incentives and expertise are not homogeneous. For example, Holderness and Sheehan (1985) find that the stock market reacts more favorably to initial block accumulations by six controversial investors, who are often portrayed in the press as raiders, than to initial accumulations by a random sample of investors. Morck, Shleifer, and Vishny (1988) find that firm value tends to be lower when the firm is run by a member of the founder's family than when it is run by an officer unrelated to the founder. Brickley, Lease, and Smith (1988) document that institutional blockholders are less willing to vote against management on antitakeover amendments when they are likely to have business dealings with the firm. When a block trades, the concentration of ownership typically does not change, but the blockholder's identity does