We investigate the monitoring effect of large outside blockholders by examining
the market reaction to partial acquisitions. After removing partial acquisitions
which lead to majority control blocks, we study a sample of initial outside block
formations. We separate the sample into three groups based on the acquirer’s
intent: activist, strategic, and financial. The three-day cumulative abnormal
returns (CAR) around activist and strategic block purchases are significant both
economically and statistically (17.55% and 15.46%, respectively), suggesting that
the monitoring and strategic benefits are economically meaningful and
comparable in magnitude. In contrast, the CAR around financial block purchases
is only marginally significant (1.42%), both economically and statistically. We
document a positive wealth effect of block size, pressure insensitivity of the block
and board representation and a negative wealth effect of the managerial
ownership of the target firm. We also find that the market reaction to activist
blocks is particularly large when there is no previous outside block. The observed
variation in the wealth effect for three different types of blocks appears to reflect
different ex-ante takeover expectations in part.
