The Block Pricing Puzzle

Abstract

There are two ways to buy a large-percentage block of stock - from another shareholder or directly from the corporation. Because the traded asset is the same, one might expect the pricing of these transactions to be similar. Block trades, however, are priced at an 11% premium to the post-announcement exchange price, while private placements are priced at a 19% discount. This difference reflects what happens after the transactions. Most block-trade purchasers become involved in management, suggesting that their premiums reflect anticipated private benefits. Most private-placement purchasers remain passive, firm value declines, and there are few acquisitions. This suggests that private-placement discounts often reflect compensation to external blockholders for helping to entrench management.

Keywords: Negotiated block trades, private placements, block pricing, discounts, premiums

JEL Classification: G3