Negotiated Block Trades and
Corporate Control
by
Michael J. Barclay
and
Clifford G. Holderness
Working Paper Series No.
MERC 89-10
May 1989
Managerial Economics Research Center
William E. Simon Graduate School of Business Administration
University of Rochester
Rochester, NY 14627
Negotiated Block Trades and
Corporate Control
by
Michael
J. Barclay
and
Clifford G. Holderness
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.
May 11, 1989
Negotiated Block Trades and
Corporate Control
by
Michael
J. Barclay"
and
Clifford G. Holderness*
1. Introduction
In this paper we investigate negotiated block trades of at least 5% of the common
stock of New York Stock Exchange
(NYSE)-
and American Stock Exchange (AMEX)-listed
corporations. Our first objective is to study the impact of these transactions on the firms
whose shares are traded. We then compare these findings with
what
is known
about
control transactions in more diffusely held firms to obtain insights into the broader market
for corporate control.
The initial public announcements of the 106 negotiated block trades in
our
sample
are associated
with
average abnormal stock-price increases of approximately 15%. The
increases tend to be larger
when
the block purchaser eventually tenders for the remaining
shares. When the
finn continues as an independent public entity, stock prices on average
increase with the announcement of the trade, decline gradually over
the
40 following days,
and remain level thereafter. Even with
the
decline, however,
the
cumulative abnormal
returns average 5.6% one year after the trade. Following
the
trades, turnover among top
managers
and
directors substantially exceeds
what
is normal for public corporations. For
*University of Rochester, William E. Simon Graduate School of Business
Administration. This research has been supported the Managerial Economics Research
Center at the Simon School. We would like to thank Richard Cusker, Hesna Genay, and
Meeta Kothare for research assistance. The authors are solely responsible for the paper's
contents.
