Block Share Purchases and Corporate Performance

Authors

  • Jennifer E. Bethel,

    1. Babson College and the U.S. Securities and Exchange Commission
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  • Julia Porter Liebeskind,

    1. University of Southern California
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  • Tim Opler

    1. Deutsche Morgan Grenfell and Ohio State University
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    • * Bethel is at Babson College and the U.S. Securities and Exchange Commission, Liebeskind is at the University of Southern California, and Opler is with Deutsche Morgan Grenfell and Ohio State University. Michael Avin, Gareth Hosford, Ming Lee, and Karen Liebowitz provided superb research assistance. We thank an anonymous referee, John Bizjac, Larry Dann, Charles Hadlock, Clifford Holderness, David Ikenberry, Chris James, Scott Lee, David Mayers, Wayne Mikkelson, Megan Partch, Michael Ryngaert, Jonathan Sokobin, René Stulz (the editor), Sheridan Titman, and seminar participants at Babson College, Boston College, Queens University, Rice University, Texas A&M, the University of Florida, and the University of Oregon for helpful comments and suggestions. The views expressed in this paper are those of the authors and do not reflect those of the Securities and Exchange Commission or Commission staff.

ABSTRACT

This paper investigates the causes and consequences of activist block share purchases in the 1980s. We find that activist investors were most likely to purchase large blocks of shares in highly diversified firms with poor profitability. Activists were not less likely to purchase blocks in firms with shark repellents and employee stock ownership plans. Activist block purchases were followed by increases in asset divestitures, decreases in mergers and acquisitions, and abnormal share price appreciation. Industry-adjusted operating profitability also rose. This evidence supports the view that the market for partial corporate control plays an important role in limiting agency costs in U.S. corporations.

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