Journal of Financial Economics 25 (1989) 371-395.

North-Holland

PRIVATE BENEFITS FROM CONTROL OF

PUBLIC CORPORATIONS*

Michael J. BARCLAY and Clifford G. HOLDERNESS

University of Rochester, Rochester, NY 14627, USA

Received August 1988, final version received August 1989

We analyze the pricing of 63 block trades between 1978 and 1982 involving at least 5% of the
common stock of NYSE or Amex corporations. These blocks are typically priced at substantial
premiums to the post-announcement exchange price. We argue that the premiums, which
average 20%, reflect private benefits that accrue exclusively to the blockholder because of his
voting power. The premiums paid by both individual and corporate block purchasers increase
with firm size, fractional ownership, and firm performance. Individuals pay larger premiums for
firms with greater leverage, lower stock-return variance, and larger cash holdings.

1. Introduction
A central premise in modern financial theory is that the ownership of
publicly traded corporations is diffuse and that shareholders receive benefits
in proportion to their fractional ownership. This premise is reflected in a
wide range of analyses. For example, portfolio theory suggests that individu-
als should diversify their holdings and own only a small percentage of a given
firm. Corporate decisions are assumed to be made by professional managers
with similarly limited ownership. Dividend policy, capital structure, invest-
ment and production decisions, the allocation of. decision rights among
claim-holders - indeed, virtually all corporate attributes - are typically
analyzed under the assumption of a proportional division of benefits to
diffuse shareholders.
Recent research shows, however, that many public corporations have one
or more shareholders who own a large-percentage block of the firms com-
mon stock. For example, a 1984 Securities and Exchange Commission survey
shows that approximately 20% of New York Stock Exchange (NYSE), Ameri-

*This research has been supported by the Institute for Quantitative Research in Finance and
by the Managerial Economics Research Center at the Simon School of the University of
Rochester. We have benefited from the comments of James Brickley, Michael Jensen (editor),
John Long, Wayne Mikkelson, Roberta Romano, Bill Schwert, Dennis Sheehan, Jerold Warner,
Ross Watts, Michael Weisbach, and Larry Dann (referee). We would like to thank Richard
Cusker and Hesna Genay for research assistance.

0304-405X/89/S3.50 Q 1989, Elsevier Science Publishers B.V. (North-Holland)

372 M.J. Barclay and C.G. Holdemess. Pricate benefits from control of public corporations

can Stock Exchange (Amex), and over-the-counter (OTC) corporations have

at least one nonofficer who owns more than 10% of the common stock, and
approximately 15% have at least one officer who owns more than lo%.
Mikkelson and Partch (1989) find that in a random sample of 240 NYSE and
Amex corporations, officers and directors on average control 20% of the
votes (median 14%).
As the extent of concentrated ownership has become known, researchers
have begun to analyze the impact of block ownership on corporate decisions.
Some of these studies, including Fama and Jensen (19831, DeAngelo and
DeAngeIo (19851, Demsetz and Lehn (19851, and Stulz (19881, suggest that
managers who own large blocks of stock receive corporate benefits dispropor-
tionate to their fractional ownership. Grossman and Hart (1988) and Harris
and Raviv (1988b) illustrate how dual-class stock and supramajority voting
rules can perpetuate the control of those who receive private benefits. There
has been little empirical evidence, however, that large-block shareholders
actually receive disproportionate corporate benefits and essentially no data
on the size or determinants of such benefits.
We analyze the pricing of 63 block trades between 1978 and 1982 involving
at least 5% of the common stock of NYSE or Amex corporations. If all
shareholders receive corporate benefits in proportion to their ownership,
large-percentage blocks will trade at the exchange price, or at a discount if
blockholders incur costs that others do not. If, on the other hand, large-block
shareholders anticipate using their voting power to secure benefits unavail-
able to other shareholders, the blocks will trade at a premium to the
exchange price. In short, we argue that because the exchange price reflects
the value of corporate benefits that accrue to all shareholders in proportion
to their fractional ownership, any difference between the block price and the
exchange price reflects benefits that accrue to the blockholder alone - the
private benefits from control.
We find that trades of large-percentage blocks of common stock are
typically priced at substantial premiums to the exchange price, even after any
stock-price changes associated with the trades accounting for. The block-trade
prices in our sample average 20% above the post-announcement exchange
price, and more than 80% of the blocks trade above that exchange price. The
average premium is $4 million (in GNP-price-deflated 1982 dollars), which
represents 13% of the block-purchase price and 4% of the value of the firms
equity. Multiple regression analysis indicates that the dollar value of the
premium paid by both individual and corporate block purchasers increases at
a decreasing rate with firm size and at an increasing rate with the fraction of

Office of the Chief Economist, Securities and Exchange Commission, A Survey of Partial
Ownership of the Common Stock of Public Corporations, unpublished document.
*Jensen and Warner (1988) suwey this literature.
 M.J. Barclay and C.G. Holdemess, Pricate benefits from control of public corporations 373

the firms outstanding common stock transferred in the block. Individuals pay
larger premiums for firms with higher leverage, lower stock-return variance,
and more cash and marketable securities. Poor firm performance before a
trade lowers the average premium.
The paper is organized as follows. Section 2 develops the hypothesis that
premiums paid for large-percentage blocks reflect the private benefits that
accrue to the block owner. We then present time-series evidence on the
stability of block ownership, which suggests that our estimate of the private
benefits from control based on block trades provides an estimate of the
private benefits from block ownership in general. Section 3 describes our
sample of block trades and presents the evidence on their pricing. We
analyze this evidence in light of the private-benefits hypothesis and two
alternative hypotheses: first, that the premiums result from superior informa-
tion possessed by the block-trading parties, and, second, that the block
purchasers simply overpay. We also discuss why large-percentage blocks
usually trade at premiums to the exchange price while discounts are typical
for large-dollar blocks [Dann, Mayers, and Raab (1977), Holthausen,
Leftwich, and Mayers (1987)], secondary distributions [&holes (1972),
Mikkelson and Partch (198.5)], and privately placed blocks of newly issued
equity [Wruck (198911. Section 4 investigates cross-sectional characteristics of
the block, the purchaser, and the firm that determine the size of the block
premium. Section 5 concludes with a brief summary.

2. The pricing of block trades and the private benefits from control of
public corporations

2.1. Inferring private benefits from block premiums

We believe that the value of any private benefits associated with voting
control of a public corporation can best be measured by analyzing the pricing
of trades of large-percentage blocks of stock. A prospective purchaser evalu-
ates two benefit streams when negotiating for a block. First, there is the
expected stream of dividends and other cash flows that accrue to all share-
holders in proportion to their fractional ownership. The market value of this
stream is captured by the exchange price of the firms stock. The exchange
price may either increase or decrease when a block trade is announced
because of anticipated management changes or simply because information is
revealed (including the block-trade price). Following any such stock-price
reaction, however, the exchange price should reflect the value of corporate
benefits that are expected to accrue to all shareholders in proportion to their
fractional ownership in the presence of the new blockholder.
The pricing of block trades also reflects the stream of any private benefits
the large-block shareholder can secure through his voting power, to the
374 hf./. Barclay and C.G. Holdemess, of public corporations
Pricate benefits from control

exclusion of other shareholders. The private benefits can be pecuniary,

including higher salaries for individual blockholders or below-market transfer
prices for corporate blockholders. For example, T. Boone Pickens alleges
that Koito, a Japanese auto part maker, has for many years been subsidizing
sales to a large shareholder, the Toyota Car Group. Mr. Pickens recently
bought a large block of stock in Koito and demanded board representation,
in part to stop the private benefits that allegedly have been flowing to
Toyota.3 Private benefits need not come from the firms cash flows, however.
For example, there may be nonpecuniary control amenities for individual
blockholders [Demsetz and Lehn (1985)] or synergies in production for
corporate blockholders [Bradley (1980)1. Our bIock trades are typically nego-
tiated at arms length, and the trading parties presumably forecast rationally
the effect of their trade on the stocks exchange price. Thus, any private
benefits will be reflected in the difference between the block-trade price and
the post-announcement exchange price.
An alternative to buying an existing large-percentage block at a premium is
to assemble a block through a series of smaller open-market transactions.
Assembling a block in a firm with an existing large-percentage blockholder,
however, will typically not be a close substitute for purchasing the existing
block. In particular, a blockholders effective control of a corporation will
almost certainly be less if he is one of two large-block shareholders than if he
is the sole blockholder. An existing blockholder thus represents a substantial
impediment to an outsiders obtaining voting control and is able to extract a
premium for his block in exchange for transferring control.
Although the premium of the block price over the post-announcement
exchange price should provide an estimate of the private benefits from block
ownership, it is likely to understate the magnitude of such benefits for three
reasons. First, even though the Securities and Exchange Commission (SEC)
requires public reporting of all consideration paid for blocks, the transacting
parties have incentives to disguise some payments. For example, even when a
firm is not fully acquired, several states require that premiums paid for large
blocks be shared with minority stockholders. Second, we do not attempt to
measure any consumer surplus associated with block ownership. Third, some
block sales do not transfer effective voting control directly, but only provide
an uncertain opportunity to gain control (perhaps after a proxy contest or the
purchase of additional stock).
Our approach to measuring the private benefits of control is similar in
some respects to Bradleys (1980) analysis of the pricing of 161 successful
interfirm tender offers. Bradley finds that the average tender-offer price
exceeds the post-offer exchange price by approximately 13%. From this he

3The Economist, August 12, 1989, p. 68.

?See, for example, Perlman v. Feldmann, 219 F.2d 173 (2d Cir. 1954).
 M.J. Barclay and C.G. Holdemess, Private benefits from control of public corporations 375

concludes that the value of the target shares [to the acquiring company]
stems not from their proportional claims to the net cash flows of the target
firm but rather from the control of the target resources that they confer.
Because Bradley focuses on corporate purchasers, he labels these gains
synergistic, but they clearly fall within our broader definition of private
benefits. Unlike Bradley, we exclude from our analysis block trades that are
closely associated in time with takeovers and going-private transactions.
Thus, any block premiums we document are likely to reflect the private
benefits from voting control of a public corporation, rather than the benefits
that result from traditional corporate control activities.
Meeker and Joy (1980) use an approach similar to ours to investigate
trades of majority blocks of stock in 37 privately held banks. They, however,
measure premiums on these blocks against book value, not market value. In
addition, they do not investigate whether premiums are paid for blocks that
fall short of a majority, nor do they investigate the determinants of block
premiums.
Although we believe that the private benefits from control provide the
most likely explanation for the substantial premiums paid for large-per-
centage blocks, we also examine two alternative hypotheses. The first is that
the premiums simply reflect the superior information of the block-trading
parties. If the market reacts quickly and fully to news of the trade (including
the block-trade price), then this superior-information hypothesis cannot
explain the premiums we document, which are calculated in relation to the
exchange price after the Wall Street Journal announcement of the trade. If,
however, market participants place some weight on their prior beliefs (in a
Bayesian fashion), the exchange price will not react fully to the new informa-
tion, and the block-trade price may differ from the post-announcement
exchange price. The second alternative hypothesis is that purchasers system-
atically overpay for blocks, either because of hubris [Roll (1986)] or because
of agency costs when the block purchaser is a diffusely held corporation (the
overpayment hypothesis). In section 3 we evaluate these alternative hypothe-
ses in light of the empirical evidence and find no support for them.

2.2. Using block premiums to estimate the private benefits from block ownership
We have argued that the pricing of block trades reflects the private
benefits from control of the firms whose shares are traded. We would also
like to argue that block premiums provide an estimate of the private benefits
from block ownership in general. Our focus on block trades, however,
introduces a potential selection bias. If a block is worth more intact than
broken up, as will typically be the case when private benefits accrue to the
blockholder, the block will be transferred intact. Such trades are precisely
what are necessary to measure the private benefits associated with voting
376 M.J. Barclay and C.G. Holderness. Pricate benefits from control of public corporarlons

control. Alternatively, the owner can break up the block and sell the shares
through a secondary offering. He will be more likely to do so when the
private benefits of block ownership are small. Therefore, if large-percentage
blocks are often broken up, the private benefits estimated from block trades
will overstate the average private benefits accruing to blockholders in gen-
eral. If, on the other hand, blocks are seldom broken up, the pricing of block
trades should provide a reasonable estimate of the private benefits from
block ownership.
The limited evidence available suggests that large blocks are seldom
broken up. Of the 345 secondary distributions analyzed by Scholes (1972),
fewer than 10% involve blocks of 5% or more of a firms common stock. To
obtain further evidence, we use CDA Investment Technologies Spectrum 5
listing of the names and fractional interests of each owner of at least 5% of
the common stock of several thousand publicly traded corporations. We
select every tenth firm from the January 1982 Spectrum, with the first firm
selected at random, and record the fractional size of the largest block (which
is at least 5%, given Spectrums selection criteria). We then record the
largest block for each firm as reported in the January 1986 Spectrum, or in
proxy statements if the firm is not in the 1986 Spectrum. Of the 519 firms
selected from the 1982 Spectrum, 394 were still listed on the NYSE, Amex,
or NASDAQ in 1986. Among these, as reported in table 1, only 16 firms (4%)
that had a 5% shareholder in 1982 lacked one in 1986, and none of these 16
had a block as large as 25% in 1982. In 73 additional firms (19%c),the largest
block was reduced between 1982 and 1986, according to our fractional
classification, but not below 5%. On the other hand, in 117 firms (30%), the
size of the largest block was increased according to our fractional classifica-
tion. This evidence suggests that large blocks, once formed, tend not to be
broken up. Consequently, it seems unlikely that focusing on block trades will
substantially bias the estimation of private benefits for large-block sharehold-
ers in general.

3. Empirical evidence on the pricing of large-block trades

3.1. Sample selection and descriptive statistics

To obtain a sample of block trades, we read the company index of the WaLl
Street Journal line by line for 1978-1982 (inclusive) to identify transactions
satisfying the following criteria: (1) A block trade comprising at least 5% of a
firms outstanding common stock is reported. (Public disclosure is typically
not required under SEC regulations for blocks below 5%.) (2) The stock is
listed on the NYSE or Amex at the time of the trade. This enables us to use

Spectrum 5 is based on 13d and 13g filings required by the SEC.

 M.J. Barclay and CC. Holdemess, Prir,ate benefits from control of public corporations 37

Table 1
Frequency distribution of the fractional ownership of the largest shareholder for 394 randomly
selected NYSE-, AMEX-, or NASDAQ-listed corporations that had at least one 5% shareholder
in 1982 and were still publicly traded in 1986. Data from Spectrum 5 and annual proxy
statements.

Size of
largest
Size of largest block in 1986
block
in 1982 0-B j-IO% IO-15% I5-25% 25-35s 35-50% Over504 Total

j-108 13 65 24 19 10 5 131
IO-1.5% 2 16 33 11 3 : 7-1
15-25% I 10 11 31 : 5 9 76
25-357c 0 0 3 lj 22 5 ? 17
3J-50% 0 2 0 I 9 I4 ; 30
Over 50% 0 1 0 0 2 0 23 26

Total 16 96 71 77 54 32 47 394

the Center for Research in Security Prices (CRSP) file of daily stock returns.
(3) The price per share and the number of shares in the block can be
ascertained from either the SEC 13d filing (if available from Disclosure, Inc.
of Washington, DC) or the Wall Sfreef Journal. This information is needed to
measure the block premium. (4) The firm is not acquired or taken private
within six months of the initial announcement of the trade. This procedure
yields a sample of 63 large-block trades that forms the basis for our analyses.
Table 2 contains descriptive statistics for our sample. The percentage of
common stock traded in the block ranges widely, from 6.6% to 63.4%, with a
mean of 20.7%. The block prices average $25.9 million (median 29.7 million),
with a range from $700,000 to $403.7 million. Finally, table 2 shows that our
sample firms are typically smaller than the average exchange-listed firm,
whether one looks at the value of all common stock or the book value of total
assets. This finding is consistent with other research documenting an inverse
relation between firm size and the frequency of large-block ownership
[Demsetz and Lehn (1985) and Holderness and Sheehan (1988)].
According to the Wall Street Journal, Moodys, and the 13ds, the 63 block
purchasers in our sample consist of 13 individuals and 50 corporations.
Typically, before the trade, the purchaser neither owns significant stock in
the firm nor is one of its directors or officers. In six instances, however, a
firms largest shareholder acquires the holdings of smaller blockholders.
Shortly after acquiring the blocks, the purchasers or their representatives
generally become directors or officers. Approximately two-thirds of the
corporate block purchasers are in the same business as the firm whose shares
they acquire, or a closely related one. For example, in one trade, IMego
International, a toy manufacturer, buys a 9% block in Tonka Toys.
378 .Ci.J. Barclay and C.G. Hoiderness. Pricare bmq3s from control ofpublic corporations

Table 2
Descriptive statistics for 63 trades involving at least 5% of the common stock of NYSE- or
Amex-listed corporations between 1978 and 1982 and descriptive statistics For all firms on the
NYSE or Amex over the period 1978-1984 (approximately 16,600 firm-years). Data on block
trades from SEC 13d filings and Wall Street Journal. Data on firm size from CRSP and
Compustat; dollar values are in millions of GNP-price-deflated 1982 dollars.

Mean Median Minimum Maximum

Percent of common
stock in block trade 20.7% 17.4% 6.6% 63.4%
Reported price of
block trade $25.9 S9.7 $0.7 5103.7
Total value of common stock
Firms with
block trades $118 SJO 93 SSSS
All NYSE and
Amex firms 5597 5 108 Sl 571.753
Book value of firms total assets
Firms with
block trades $262 5.89 $5 S1.680
All NYSE and
Amex firms $1,814 $209 $1 SlXS.185

The sellers are almost equally divided between corporations and individu-
als. Four of the block sellers are founders of the firm or members of the
founders immediate family. Before the trade, 19 of the 31 individual sellers
are directors, with 12 also serving as corporate officers. The sellers typically
dispose of all their shares through the block trade and resign their corporate
positions shortly thereafter. Finally, none of our block-trading parties are
institutions such as banks, mutual funds, or pension funds, although one
block is purchased by the firms employee stock ownership plan. This lack of
participation by institutional investors apparently reflects legal limits on their
fractional ownership and the requirement that they diversify their holdings.

3.2. Block premiums and the private benefits from control

Table 3 presents summary statistics on the relation between the block-trade
price and the closing exchange price on the day of the Wall Street Journal
announcement of the trade. A frequency distribution is provided in fig. 1.
The average price for our 63 sample trades is 20.4% above the post-announ-
cement exchange price (median 15.7%), with a range from -59.6% to 107%.
The premiums average $4.1 million (median $1 million), which represents
13.1% of the average block purchase price (median 14%) and 4.3% of the
total exchange value of the firms equity (median 2.1%). Most notably, 80%
 .$f. J. Barclay and C.G. Hoidemess. Pricate benefits from control of public corporations 379

Table 3
Comparisons of the price of 63 trades of at least 5% of the common stock of NYSE- or
Amex-listed corporations between 1978 and 1982 with the closing exchange price on the day of
the initial Wall Street Journal announcement of the trade. (Standard errors of the means given in
parentheses.) Block prices from SEC 13d or Wall Street Journal. Exchange prices from CRSP;
dollar values are in millions of GNP-price-deflated 1982 dollars.

Mean Median Minimum Maximum

Premium of block trade 20.4% 15.7% - 59.67c 107.0%

price over exchange price (3.5)
Total dollar block premium S-t.1 $1.0 $ - 9.7 S99.4
(block-trade price less exchange price (1.7)
times number of shares in block)
Block premium as a percentage 13.1% 14.0% - 147.47c 101.6%
of block purchase price (3.4)
Block premium as a percentage 4.3% 2.1% - 32.5% 562%
of total market value of the firms equity (1.2)

Frequency
6

-60 -40 -20 0

20 40 60 80 100
Premium of Bock Trade Price Over
Post-announcement Exchange Price (X)

Fig. 1. Frequency distribution of the premium of the block-trade price to the closing exchange
price on the day of the initial Wall Street Journal announcement for 63 trades of at least 5% of
the common stock of NYSE- or Amex-listed corporations between 1978 and 1982. Block prices
from SEC 13d or WaN Street Journal; exchange prices from CRSP.
380 .tl.J. Barclay and C.G. Hoidemess, Prirate bentits fromcontrol of public corporations

of the block-trade prices exceed the post-announcement exchange price.

(Unless specified otherwise, all future references to the exchange price are to
the closing exchange price on the day of the initial Wall Street Journal
announcement of the block trade.)
Calculating the block premium would be complicated if the trades often
involve noncash payments that are difficult to value. According to press
reports and SEC filings, however, only eight of our 63 trades involve pay-
ments other than cash. Six of these eight transactions involve cash and
short-term notes (generally less than two years); the other two involve cash
and stock. In all eight transactions, cash is the primary mode of payment. For
transactions with noncash payments, we value the stock at its market value
and the short-term notes at face value. The average premium on the eight
blocks involving noncash payments approximates the average premium for
the sample as a whole.
As discussed in section 2, we interpret these block premiums as reflecting
the anticipated (net) private benefits from obtaining voting control of a public
corporation. Thirteen blocks (20% of the sample), however, are priced at a
discount to the post-announcement exchange price. These discounts suggest
that block ownership involves private costs as well as private benefits. We
identify some of these costs of block ownership in section 4.6. If blockholders
bear private costs that other shareholders do not (such as underdiversified
personal portfolios or the threat of litigation brought by minority sharehold-
ers), and if these costs exceed the anticipated private benefits, potential
purchasers will not be willing to buy the block unless it is priced at a
discount. The existing blockholder will agree to sell his block intact at a
discount, instead of breaking it up, if breaking up the block will cause the
exchange price to fall by more than the discount. The breakup of a block will
cause the exchange price to fall if the blockholder provides valuable manage-
ment or monitoring services to the firm.
The management and monitoring services provided by large-block share-
holders in public corporations have received considerable recent attention.
For example, Barclay and Holderness (1989) examine 106 negotiated block
trades and document significant abnormal stock-price increases associated
with them. The stock-price increases are largest when the blockholder
eventually acquires the minoritys interest. Even when such an acquisition
does not occur, the trades are still associated with significant positive abnor-
mal returns and are followed by considerable change within the firm. For
example, 33% of the firms that are not acquired replace their chief executive
officer within a year of the trade. Demsetz and Lehn (1985) propose that
monitoring by a large-block shareholder will be more valuable, and hence
concentrated ownership more likely, as the variance of a firms cash flows
increases. Shleifer and Vishny (1986) illustrate how the existence of a
blockholder who monitors but is not a manager can increase firm value by
 i~l.J. Barclay and C. G. Holdemess. Prkare benefin from conrrol of public corporations 381

facilitating the acquisition of the firm and the introduction of a superior

management team. Finally, Wruck (1989) documents abnormal stock-price
increases associated with private placements of large-percentage blocks of
common stock and suggests that in some instances blockholders serve as
catalysts that align manager and shareholder interests.
Although blockholders can simultaneously receive private benefits and
provide management and monitoring services, they do not necessarily do so.
The chairman of the board of a professional sports team, for example, may
enjoy such private benefits as talking with the players, having access to a
luxury sky box, and being interviewed on television. The existence of his
block will have little effect on the firms stock price, however. unless he is
involved in management. In other firms, conversely, the nature of the
business provides few private benefits, but the value of management or
monitoring services provided by the blockholder is likely to be substantial.

3.3. Ecidence on alternative hypotheses for the block premiums

The superior-information hypothesis. If the block premiums do not reflect
private benefits but simply the trading parties superior information about
firm value, then rational Bayesian updating by other market participants will
lead to stock-price increases for blocks that trade at a premium and to
decreases for blocks that trade at a discount. To test this superior-informa-
tion hypothesis, fig. 2 provides the cumulative abnormal stock returns from
five days before until five days after the initial public announcement of our
trades. Blocks that trade at a premium to the pre-announcement exchange
price and blocks that trade at a discount are shown separately. Contrary to
the prediction of the superior-information hypothesis, the stock-price changes
are positive, on average, regardless of whether the block is priced at a
premium or a discount. For example, the two-day abnormal return at the
announcement of the trade (days - 1 and 0) is 2.73% (t = 2.32) for blocks
priced at a premium and 1.25% (t = 0.81) for blocks priced at a discount; the
returns from five days before through five days after the announcement of
the trade are 6.16% (t = 5.62) and 7.37% (t = 2.99) for the respective
subsamples. This pattern of returns is inconsistent with the hypothesis that
our premiums can be explained by the superior information of the trading
parties.
If block purchasers truly have superior information about firm value, then
over the long run they should on average earn at least a normal rate of return
on their shares solely from the cash flows that accrue proportionally to all
shareholders. This does not appear to be the case. In the two years following

6These stock-price increases provide additional evidence that blockholders provide manage-
ment and monitoring services.
382 zM./. Barclay and C.G. Holdemess, Priwte benefits from control of public corporations

30 -
+ Average Premium
25 -

20 -

15 -

Cumulative 10 -
Abnormal
Return (2) S&s Traded
5 - at Discounts\ .a._._.--

0 M--*-
HOdTRllbd /
-5 - at Premiums
+ Average Discount
I I I I I I I I I I
-lo-
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day in ReIdon to @lock Tmde Announcement

Fig. 2. Cumulative abnormal returns (market-model prediction errors) associated with 63 block
trades involving at least 5% of the common stock of NYSE- or Amex-listed corporations
between 1978 and 1982. Day 0 represents the day of the Wall Streef Journal announcement of the
block trade. Block prices from SEC 13d or IVaN Street Journal: exchange prices from CRSP.

a block trade, the firms whose blocks are purchased at a premium to the
pre-announcement exchange price have cumulative average abnormal stock
returns of only 2.8% (t = 0.27). The exchange prices never catch up with the
premiums for these trades (which average 28%), suggesting that the block
premiums do not reflect superior information about firm value.
The overpayment hypothesis. Another alternative explanation for the pre-
miums we document is that block purchasers simply overpay, One version of
this hypothesis posits that the winning bid in an auction comes from the
bidder with most optimistic (and typically overly optimistic) information. This
notion of a winners curse, however, is typically applied to situations where
there is no market consensus on the value of the object being auctioned (for
example, oil or mineral rights for previously unexplored territories). In block
trading, there is a clear market valuation for the cash flows that accrue to all
shareholders, namely, the exchange price.
 .V.J Barciuy and C.G. Holdemess. Pril.ate benefits from control of public corporations 383

Perhaps the best empirical test of the overpayment hypothesis would be to

analyze the pricing of subsequent trades of a given block. A normal rate of
return from block trade to block trade would be inconsistent with the
overpayment hypothesis. Because multiple trades of a particular block are
rare, we are unable to conduct this test. We can, however, examine the
stock-price reaction to announcements of blocks purchases by publicly traded
corporations. If the market regards the block price as too high, then the
purchasing corporation will experience a negative abnormal stock return at
the announcement of the trade. The 26 corporate purchasers in our sample
for which data are available on the CRSP NYSE, Amex, or NASDAQ tapes
have average two-day announcement period abnormal returns of 0.03%
(t = 0.04). The five firms in this sample that purchase blocks at a discount
have two-day announcement period returns of - 1.6% (t = - 1.011, and the
21 firms that purchase blocks at a premium have returns of 0.4% (t = 0.41).
Although none of these returns is statistically different from zero, they offer
no support for the overpayment hypothesis. Thus, among the competing
explanations for the substantial premiums on large-percentage block trades.
the data are most supportive of the private-benefits hypothesis.

3.4. Comparison with the pricing of other qpes of block trades

The premiums we find for large-percentage block trades contrast with the
discounts typical of other types of block trades. Dann, Mayers, and Raab
(1977) and Holthausen, Leftwich, and Mayers (1987) examine block trades
that are large in relation to normal trading volume, yet much smaller in
percentage terms than our blocks. For example, of the 358,000 trades
examined by Holthausen, Leftwich, and Mayers, only 256 exceed 2% of the
issuing firms equity. They find that these blocks are priced at premiums or
discounts of l-2% to the post-trade exchange price depending on whether
the trades are buyer- or seller-initiated. One interpretation of their evidence
is that owners of large-dollar but small-percentage blocks are unab!e to
secure private benefits because they lack sufficient votes to influence manage-
ment, and their relatively small discounts and premiums reflect the costs of
liquidity. Such liquidity costs presumably cannot explain our premiums, which
average 20%.
Scholes (1972) and Mikkelson and Partch (1985) find that secondary
distributions are typically priced at discounts to the exchange price. The
blocks they study are typically smaller, in percentage terms, than ours, and
are broken up. As noted earlier, blocks that convey private benefits are likely
to be transferred intact. Thus, these two studies provide further evidence that
small-percentage blocks do not contain enough votes for the block owner to
influence management and secure private benefits.
38-l Al./. Barclay and C.G. Holdemess. Pricate benefits from control of public corporations

Wrucks (1989) study of privately placed new equity issues does address
large-percentage blocks of stock (average SO%, median 12%). On average,
these blocks are priced at a discount to the exchange price, although the
variation in pricing is large and many are priced at a premium. We offer two
possible explanations for the difference between Wrucks results and ours.
First, even though it was not a selection criterion, all of our blocks involve
the firms largest blockholder, and some of Wrucks do not. If private benefits
accrue exclusively to the largest blockholder in the firm, smaller blocks will
not trade at a premium. Second, and most important, our trades are negoti-
ated at arms length, whereas Wrucks are placed privately by management.
This raises the possibility that management receives benefits in exchange for
placing the block at a favorable price (for example, the blockholder agrees
not to replace them).

4. Determinants of block premiums

In this section we use characteristics of the block, the purchaser, and the
firm to investigate cross-sectional variation in the pricing of our block trades,
with several goals in mind. Most notably, we want to see if cross-sectional
analysis supports our interpretation of the block premiums as reflecting
private benefits from voting control. By obtaining insights into the determi-
nants of block premiums, we will also better understand why some firms have
blockholders while others do not. Finally, the results of our cross-sectional
regressions can verify or refute predictions in the emerging literature on
large-block ownership about how private benefits from control affect specific
corporate decisions.

4. I. Characteristics of the block

The most salient characteristic of the block is the fraction of the firms
common stock it represents. Greater fractional ownership gives the block-
holder more influence in the election of directors and thus more autonomy as
a corporate manager or monitor. A larger ownership share also provides
greater protection from a hostile takeover or proxy contest. Beyond a certain
point, however, few additional private benefits will result from increased
fractional ownership if the blockholder already dominates the board and if a
hostile takeover is unlikeIy to succeed. If blockholders tend not to accumu-
late shares beyond this point and if the threshold varies by firm, there will be
no discernible relation between fractional ownership and block premiums.
Finally, if increased fractional ownership results in greater private costs (such
as underdiversified personal portfolios for individual blockholders) without a

This information was given to us by the author.

 .$I./. Barclay and C.G. Holderness. Pricate benefits from control of public corporations 355

compensating increase in private benefits, the relation between fractional

ownership and the net value of private benefits will be negative. Thus, the
relation between fractional block size and the private benefits from control,
as reflected in the block premium, is not obvious.
The premium is also likely to be affected if the block includes securities
other than common stock (for example, preferred stock or corporate deben-
tures). Even if the gross benefits from control are unaffected by the inclusion
of other securities, the cost of holding the block increases (and thus the net
benefits decrease) when some of the attendant securities are illiquid. In
addition, inclusion of other securities in the block offers an opportunity to
understate the premium on the common stock by inflating the value of the
less liquid securities. Thus, we hypothesize a negative relation between
the premium and the inclusion of securities other than common stock in the
block.

4.2. Charactetistics of the purchaser

Recent studies suggest that both the size and the nature of private benefits
from large-block ownership are likely to depend on whether the block owner
is an individual or a corporation. Holderness and Sheehan (1988). in their
analysis of 114 NYSE- or Amex- listed corporations with majority sharehold-
ers, find that individual blockholders who are also CEOs tend to pay
themselves a higher salary than the CEOs from a matched sample of similar
firms with diffuse ownership. Demsetz and Lehn (1985) note that individuals
are likely to value opportunities to consume perquisites more highly than will
corporate blockholders. Corporate blockholders, in contrast, care more about
gaining access to a firms production technology in order to take advantage of
synergies or economies of scale with their own production.

4.3. Characteristics of the firm

Several characteristics of the firm whose shares are traded seem likely to
influence the private costs and benefits of block ownership. Most promi-
nently, private benefits should increase with firm size because larger firms
offer potentially larger pecuniary and nonpecuniary benefits. Private costs
should also increase with firm size, as larger firms are likely to be monitored
more closely by security analysts, government officials (in particular, the
SEC), and institutional investors. Antitrust litigation is also more likely when
large firms in related industries have interlocking ownership.
The firms assets and capital structure should also affect the pricing of
block trades. We predict that private benefits will increase with the amount
of cash and marketable securities in the firm at the time of the trade, because
more cash facilitates investments by the new large-block shareholder as well
386 .M.J. Barclay and CC. Hoidemess. Pricare benefits from control of public corporations

as the payment of generous compensation or other perquisites. The strength

of this relation will be magnified if there is a positive association between
current cash balances and anticipated future free cash flow. Of course, a firm
with low cash balances could raise additional funds in the external capital
market. The arguments of Easterbrook (19841, Jensen (1986), and others,
however, suggest that external funds are accompanied by greater external
monitoring, which in turn reduces managerial discretion.
The a prioti relation between private benefits and debt is less clear. Jensen
(1986) demonstrates how debt can constrain managements access to free
cash flow, suggesting a negative relation between debt and private benefits
from control. Harris and Raviv (1988a) and Stulz (19881, in contrast, show
how debt can increase managements effective control over corporate assets.
In their models, managers safeguard their jobs and the attendant private
benefits by holding blocks of stock to impede hostile takeovers. Personal
wealth constraints limit the effectiveness of this strategy, but managers can
extend their effective control for a given equity investment by increasing
leverage. This argument suggests a positive relation between leverage and
private benefits from control.
We also examine the variance of the firms common stock returns preced-
ing the trade. The effect of stock-return variance on a block premium should
depend on whether the block purchaser is a corporation or an individual.
The managers of a diffusely held corporation should have less concern about
this variance because their shareholders can diversify the risk through the
capital markets. This will typically not be possible for individual block
purchasers. Since the average cost of the blocks purchased by individuals in
our sample is $6.6 million (median $5 million), such purchases are likely to
lead to underdiversified personal portfolios. Thus, a risk-averse block pur-
chaser will be willing to pay less for a block, ceteris paribus, as the stock-
return variance increases.
We hypothesize that block premiums will be smaller if the firm is experi-
encing financial difficulties at the time of the trade. Private costs of block
ownership, for example, will increase if the blockholder needs to spend more
time monitoring management or participating in corporate decisions. In
addition, because litigation tends to increase when a firm is in trouble,
blockholders in such firms face a greater probability that litigation will be
brought against them personally. At the same time, the private benefits of
block ownership will decrease if the financial difficulties lower the block-
holders salary and perquisites.
We use the firms common stock return in the year before the trade (in
relation to the return on other firms in the same industry) as a proxy for the
firms financial condition at the time of the trade. The greater the return in
the pre-trade period, however, the greater is the sellers capital gain and tax
obligation triggered by a sale of the block. The larger this tax liability, the
larger will be the sellers reservation price. If block prices tend to approxi-
 .Il.J. Barclay and C.G. Holdrmess. Priuzte benejits from control of public corporattons 387

mate sellers reservation prices, we would expect this tax liability to result in
. .
a postttve association between the firms common stock return before the
trade and the size of the block premium. If, on the other hand, block prices
tend to reflect buyers reservation prices, the sellers tax basis will not
significantly affect the size of the premium.

4.4. The choice of dependent cariables

As discussed in section 2, a prospective block purchaser assesses two
streams of benefits when negotiating for a large-percentage block: propor-
tional cash flows that accrue to all shareholders and net private benefits that
accrue to the blockholder alone. The economic theories outlined above relate
most directly to the total dollar value of the net private benefits, which can be
measured as the block-trade price (p,> less the post-announcement exchange
price [(p,), times the number of shares in the block (N,). In the following
regressions, however, we standardize this dollar premium by dividing by the
total market value of the firms outstanding equity measure at the exchange
price ( p,N, 1. The standardized dollar premium [( pb - p,)N,/p,N, I is less
skewed and more closely approximates the normal distribution than does the
unstandardized dollar premium; it also has an intuitive interpretation as the
value of the private benefits as a percentage of the total value of the firms
equity.
We also run our regressions using the block premium per share as a
percentage of the exchange price [(p, -p,)/p,l as the dependent variable.
The premium per share is the variable most commonly employed in the
previous block-trading literature [for example, Dann, Mayers, and Raab
(1977)l. This measure of the premium, however. is equal to the standardized
dollar premium divided by the fraction of the firms stock in the block. Thus,
using the per-share premium as the dependent variable could lead to difli-
culties in interpreting the regression coefficient for the fractional size of the
block. For example, even if the total dollar value of the private benefits from
control increases with the fraction of the firms stock in the block, it is not
clear whether the per-share premium will be increasing or decreasing.
Nevertheless, because theory provides little guidance on the precise func-
tional relation between the dependent and independent variables, using the
per-share premium as the dependent variable provides a useful check on the
robustness of our results.
A potential problem with the interpretation of some of our regression
coefficients might also arise if buyers and sellers reservation prices differ
significantly. Economic theory tells us only that transaction prices will be
bounded by the buyers and sellers reservation prices. Random fluctuations
between buyers and sellers reservation prices will add noise to the regres-
sion and reduce the significance of our results. If block prices approximate
buyers reservation prices, however, then characteristics of the buyer will be
388 .Cf.J. Barclay and C. G. Holderness, Pricate benefits from control of public corporarions

significant in the regression analysis, and conversely for the seller. Our
regression results suggest that characteristics of the buyer have significant
cross-sectional explanatory power whereas those of the seller do not.

4.5. Regression results

The independent variables and their sources are listed in table 4, and the
regression results are reported in table 5. Regressions 1 and 2 use the total
net private benefits standardized by firm size as the dependent variable;
regressions 3 and 4 use the percentage premium of the block price over the
exchange price. The regressions explain between 34% and 61% of the
cross-sectional variation in the block premiums. Each regression has a
p-value on the F-statistic of less than 0.001. We report standard ordinary-
least-squares regression coefficients and f-statistics. The significance levels
are not qualitatively affected when we make the White (1980) correction for
heteroskedasticity.
In the first regression in table 5, the coefficient for the fraction of the firms
common stock in the block trade is positive and highly significant. The second
regression tests whether the relation between private benefits and fractional
ownership is linear by estimating a piecewise linear specification. The re-
ported regression allows for a different slope coefficient for blocks represent-
ing less than and more than 25% of the firms common stock. (A number of
other break points were also estimated; the results are not highly sensitive to
a choice ranging between 20% and 30%.)
For blocks below 25%, the point estimate is positive, but small and
statistically insignificant. For blocks above 25%, the coefficient is larger and
highly significant. Thus over the range of our observations, the degree of
effective voting control and the value of private benefits appear to increase at
an increasing rate with fractional ownership. It would be interesting to
observe what happens to premiums as blocks approach and then exceed 50%,
but we have too few observations to analyze this ownership range systemati-
cally.
Other studies have likewise identified nonlinear effects associated with the
fraction of a firms stock held by the largest shareholder(s). Merck, Shleifer,
and Vishny (1988) find that Tobins Q (which they use as a proxy for
managerial effectiveness) increases as board of director stock ownership
increases from 0 to 5%, decreases as board holdings rise from 5% to 25%,
and then rises slightly as board holdings increase further. Wruck (1989) finds
that when firms announce private pIacements of new equity, firm value tends
to increase when the six largest shareholders own less than 5% or more than
25% of the common stock after the placement; firm value tends to decrease
when they own between 5% and 25%. These studies suggest that the
activities of blockholders, and thus the effects of block ownership on firm
 .Cl.J. Barclay and C.G. Holderness. Prwate benefits from control of public corporutlons 389

Table 1

Detinition and source of data for variables used in cross-sectional regressions in table 5.

Variable Definition Data source

_-
Percent of equity Number of shares in block SEC 13d or
purchased as a percentage of the total Wall Street /ownal
number of shares outstanding

Percent less than 25% Percentage of equity purchased SEC 13d or

if less than _TjG.I . othenvise _
5%I Wall Street hunal
Percent over 259 Zero if percentage of equity SEC 13d or
purchased is less than 25%: Wull Street Jownal
otherwise percentage of equity
purchased minus 255

Log of tirm size The natural logarithm of the CRSP

total market value of the
firms equity

Leverage Book value of debt over book Compustat

value of assets

Cash Cash and marketable securities Compustat

over book value of assets

Standard deviation of The daily standard deviation of CRSP

common stock return the percentage common stock return
for the 12 months ending two months
before the block-trade announcement

Individual purchaser Dummy variable set equal to one if SEC 13d or

purchaser is an indivjidual and WuN Street Jottmrrl
zero otherwise

Leverage (individual) Leverage variable times individual

dummy

Cash (individual) Cash variable times Individual dummy

Standard deviation Standard deviation variable times

(individual) individual dummy

Other securities purchased The natural logarithm of the dollar SEC 13d or
with block value of other securities included Wall Street Journal
in block trade

Prior firm Percentage common stock return CRSP

performance for the 12 months ending two months
before the block-trade announcement
minus the return on an equally-weighted
portfolio of all NYSE and Amex firms
in the same SIC two-digit industry
classification
 390 MJ. &&a~. a& C.G. Holderness. Pricare benefirs from control of public corporations

Table 5
Coefficients of ordinary-least-squares regressions of the premiums paid in 63 trades involving at
least 5% of the common stock of NYSE- or Amex-listed corporations on various block
characteristics. firm characteristics. and block purchaser characteristics. All variables are defined
in table 4. (t-statistics given in parentheses.)

Deoendent variable
Independent Block premium Percentage premium of block
variable as percent of firm equity price over exchange price
- _-___
Regression number (1) (2) (3) (4)
Intercept 20.92 24.78 89.66 96.13
(1.24, (1.57) (1.54) (1.66)
Percentage of equity O.JSh - 0.62b -
purchased (6.40) (2.39)
Percent less than 25% - 0.05 - -0.11
(0.30) C-0.18)
Percent over 25% - 0.85h - l.24h
(5.94) (2.36)
Log of firm size - 1.14 - 1.21 - 4.34 -4.46
(- 1.37) f- 1.57) (- 1.52) (- 1.58)
Leverage 0.003 - 0.002 -0.01 0.01
(0.19) f-0.14) f-0.19) (0.16)
Cash - 0.03 - 0.06 -0.12 -0.17
(-0.44) t - 0.93) f - 0.52) ( - 0.73)
Standard deviation of - 1.52 - 0.32 -0.73 - I.31
common stock return f - 1.39) t-0.29, C-0.19) ( - 0.32)
Individual purchaser 30.13h 36.96 52.27 63.7jh
(3.50) (4.44) (1.76) (2.09)
Leverage (individual) 0.50h 0.52 l.46h 1.49h
(4.77) (5.33) (4,06) (1.18)
Cash (individual) 0.48b 0.5gb l.SOh l.9jh
(3.44, (1.26) (3.78) (4.0)
Standard deviation - l&5@ - 19.5 lh - 34.63 - 39 5jb
(individual) f - 5.53) f - 6.59) t - 3.35) t - 3:64)
Other securities - 1.22b - l.7b - 3.09b -3.17b
purchased with block f - 3.92) ( - 4.37) ( - 2.89) f - 2.99)
Prior firm 0.03 0.04 0.15 0.17b
performance (1.33) (1.75) (1.82) (1.97)
Adjusted R-square 0.55 0.61 0.36 0.34

Significantly different from 0 with two-tailed test at the 0.10 level.

bSignificantly different from 0 with two-tailed test at the 0.05 level.
 ht. J. Barclay and C.G. Holderness. Prkate benefits from control of public corporations 391

value, vary as the fraction of stock held by the largest shareholder(s) exceeds
25%.
Table 5 also reports that private benefits as a fraction of firm size decline
with the log of firm size, although the statistical significance of this relation is
marginal. Additional regressions (not reported here) with the total dollar
value of the private benefits as the dependent variable and the same
independent variables indicate that the total dollar value of the private
benefits increases at a decreasing rate with firm size.
The coefficients for leverage and for the value of cash and marketable
securities held by the firm at the time of the trade are insignificant for the
sample as a whole. When multiplied by a dummy variable set equal to one
when the purchaser is an individual and zero otherwise, however, both
variables become positive and significant. This positive effect of leverage on
the premium paid by individual block purchasers is consistent with the
hypotheses of Harris and Raviv (1988a) and Stulz (1988) that individuals with
limited personal resources can exert effective control over more corporate
assets, and consequently receive larger private benefits, when a firm is
leveraged. The regression does not support Jensens (1986) argument that
debt is useful in controlling the agency costs of free cash flow. A possible
explanation, however, is that these firms do not have significant free cash
flow. The coefficient for cash and marketable securities indicates that individ-
uals perceive substantial private benefits from controlling assets that are
particularly liquid. These funds can be used, for example, to pay the block-
holder a large salary, or they can be spent on perquisites or investment
projects favored by the blockholder.
The standard deviation of the firms stock return preceding the trade is
likewise insignificant for the sample as a whole. When the block purchaser is
an individual, however, higher stock-return volatility significantly reduces the
premium. This result is consistent with the proposition that risk-averse
individuals with limited personal capital have underdiversified portfolios
when holding a large-percentage block of stock. An increase in the standard
deviation of the stocks return increases the cost of holding the block and
thus lowers the block price. Corporations, on the other hand, do not require
compensation for nonsystematic risk because their shareholders can diversify
it through the capital markets.
In two of our observations, the block purchaser acquires long-term debt
and preferred stock in addition to the common stock. Although we are
reluctant to draw conclusions from two observations, the regression results
suggest that the inclusion of such securities significantly reduces the block-
trade premium.
Finally, the regressions show that the greater the firms pre-trade stock
return (in relation to the returns of other firms in the industry), the greater
the block premium. If the pre-trade stock return reflects the financial health
392 .W.J. Barclay and C.G. Holdemess. Pnrate benefits from control of public corporarions

of the firm at the time of the trade, this finding suggests that the private costs
of block ownership increase or the private benefits decrease (or both) when
the firm is experiencing financial difficulties.
In summary, the premium of the block-trade price over the post-announce-
ment exchange price for large-percentage blocks of common stock increases
at an increasing rate with fractional ownership; the dollar value of the
premium increases at a decreasing rate with firm size. Apparently because of
their limited capital and risk-aversion, individuals pay a larger premium when
the firm is leveraged and when it has a lower stock-return variance. Individu-
als also pay a larger premium for firms with large balances of cash and
marketable securities at the time of the trade. The better a firms stock
return in relation to its industry in the year before the trade, the greater the
block premium. In general, these findings are consistent with our interpreta-
tion that block premiums reflect private benefits from voting control.

4.6. Why some blocks are priced at discounts

Although most of our blocks trade at premiums to the post-announcement
exchange price, 13 (20%) are priced at discounts. Our regression results
suggest that there are private costs as well as private benefits associated with
block ownership. Since these costs vary cross-sectionally, it is reasonable that
the net private benefits of block ownership are negative for some firms. A
blockholder will agree to sell his block intact at a discount to the exchange
price if breaking it up would cause the exchange price to fall by more than
the discount. Although an analysis of the effects of breaking up a block is
beyond the scope of this paper, we can provide some insights into when the
private costs of block ownership are likely to exceed the private benefits.
Three of the 13 blocks that trade at discounts to the post-announcement
exchange price trade at or above the pre-announcement exchange price. The
discounts of these three blocks are small, and it is likely that they simply
reflect an underestimation of the announcement effect or unanticipated
stock-price changes between the consummation of the trade and the public
announcement. The more substantial discounts are often associated with
firms in severe financial distress at the time of the trade, suggesting that the
private costs of block ownership are likely to increase during times of
financial difficulty. In such firms, for example, blockholders are likely to
spend considerable time monitoring management, and they face an increased
threat of litigation brought by disgruntled minority shareholders. In the year
before the trade, the five firms whose blocks trade at a 10% or greater
discount had industry-adjusted returns of - 8% and market-model-adjusted
returns of -31%. In contrast, the 37 firms whose blocks trade at a 10% or
greater premium had industry-adjusted returns of 1.6% and market-model-
adjusted returns of 0.3%.
 M.J. Barclay and C.G. Holderness, Pnt,ate benefits from control of public corporations 393

The effects of financial distress on the private costs of block ownership can
be illustrated by the 55% block in Leisure Technology Corporation, which
traded at the largest discount in our sample, 59.6%. At the time of the sale,
the block was in probate (having been owned by the companys founder), and
the firm was in financial difficulty. In the year before the trade, Leisure
Technology had a cumulative abnormal return 51% below the market and
47% below that of the other firms in its industry; during that year it also
defaulted on a $34 million loan. An earlier attempt to sell the block at a
premium was rejected by a prospective purchaser. A former chief executive
officer of the firm finally agreed to purchase the block at a discount. The
transacting parties evidently anticipated that the purchaser would take the
lead in returning the firm to profitability: attached to the 13d is a 19-page
employment contract specifying that the block purchaser will become the
chief executive officer and will be prohibited from holding any other employ-
ment for five years.
A similar picture emerges for Revere Copper and Brass Inc., whose 42%
block traded at a 15% discount. As with Leisure Technology, Revere Copper
and Brass substantially underperformed both the market (- 107%) and its
industry (-- 72%) in the year before the trade. During that year it also
omitted its regular dividend, laid off approximately 15% of its employees, and
was added to Standard & Poors CreditWatch. Two months before the trade
was announced, the firm filed for protection from creditors under Chapter 11
of the U.S. Bankruptcy Code.
The remaining three blocks that traded at a 10% or greater discount
suggest the influence of factors other than financial distress that are likely to
increase the costs of block ownership. In one case, the block purchaser
acquired two separate blocks in Heinicke instruments. The first block (21%)
was acquired at a 15% discount from the firms largest blockholder, who was
defeated by the firms management in his attempt to gain board membership.
This block apparently did not convey voting control, and the discount
probably reflects the expected costs of future conflicts with management. The
second block (10%) was acquired a week later at a 7.6% premium. The seller
of this block arguably could obtain a premium because his block was likely to
(and in fact did) convey voting control of the corporation when combined
with the larger block.
A 12% block of Berkey Photo was sold by the companys aging founder,
Benjamin Berkey, at a 20% discount. This transaction was negotiated through
a broker, and Mr. Berkey did not know the identity of the buyer until after
the trade. This is different from most of our trades, in which the transaction
was negotiated directly between the buyer and seller.
With the final substantial discount, in addition to acquiring a 42% block of
common stock (for $46.8 million) in Susquehanna Corporation at a 22%
discount, the block purchaser also acquired $10.1 million of the companys
39-l zW. Barclay and C.G. Holderness. Pricare benqirs from control of pubk corporarlons

preferred stock, $13.1 million of its debt, and $1.9 million of warrants to
purchase additional common stock. Because the other securities in the
transaction are not actively traded, it is difficult for us to ascertain whether
the entire package traded at a premium or a discount. If the package did
trade at a discount, it could reflect the portfolio costs of holding illiquid
securities (as discussed in section 4.5).
In aggregate, these five substantial discounts support the proposition that
there are private costs as well as private benefits associated with block
ownership, and, in some (atypical) cases, the net private benefits are negative.

5. Conclusion

We document that trades of blocks involving at least 5% of the common

stock of NYSE- and Amex-listed corporations are typically priced at substan-
tial premiums to the post-announcement exchange price. The average pre-
mium is 20%, which represents approximately 4% of the total value of the
firms equity. These rest&s call into question the widely held assumptions
that shareholders are homogeneous and that corporate benefits are dis-
tributed to shareholders in proportion to their fractional ownership. Instead,
the block premiums suggest that large-block shareholders typically use their
voting power to secure private corporate benefits that do not accrue to other
shareholders.
We examine characteristics of the block, the purchaser, and the firm to
investigate cross-sectional variation in the pricing of block trades. Multiple
regression analysis indicates that the dollar value of the block premium
increases at a decreasing rate with firm size and at an increasing rate with the
fraction of the firms outstanding common stock transferred in the block.
Individuals pay larger premiums for firms with higher leverage, lower stock-
return variance, and more cash and marketable securities. Poor firm per-
formance before a trade lowers the average premium. Indeed, when
performance before a trade is especially poor, we find that some blocks are
actually priced at discounts, presumably to compensate the purchaser for the
expected net private costs of being a corporate insider during times of
financial distress.
Blockholders ability to secure private benefits will likely affect a number of
important corporate decisions, some of which have already been explored in
the emerging literature on concentrated ownership. Relevant issues include
the motivations for large-block ownership [Demsetz and Lehn (1985)1, incen-
tives for corporate takeovers [Bradley (1980)], managerial resistance to corpo-
rate takeovers [Stulz (1988)], internal monitoring by large-block shareholders
[Shleifer and Vishny (1986)], and the design of voting rules that maximize the
value of outstanding securities [Grossman and Hart (1988) and Harris and
Raviv (1988b)]. Our results support these diverse analyses of the relation
between corporation decisions and concentrated stock ownership.
 Al. J. Burclay and C.G. Hoirlrmrss. Pm cttr benrfits from control ofpublic corporations 395

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