What Drives Shareholder Reaction and Wealth Effect in Block Trades? Evidence from the Warsaw Stock Exchange

ABSTRACT

The main objective of this article is to present the determinants of shareholder reaction to block trades and their wealth effect on the Warsaw Stock Exchange. The positive abnormal returns obtained for the entire sample indicate that block trades create shareholder value. Shareholders reacted positively to block trades without a control transfer in the Polish market, and their reaction was stronger than in the US market. Abnormal returns of block trades concluded at a discount were twice as high as those for the entire sample. Moreover, cross-border block trades had a negative impact on shareholder value creation, as did financial investors as an acquirer. However, cumulative average abnormal returns (CAARs) were driven up by the relative power of minority shareholders (ocean) prior to the transaction. The absolute size of the block acquired by an investor was also observed to have a positive impact on price rises and abnormal returns.

KEYWORDS:

• abnormal returns
• block trades
• corporate control

JEL Classifications:

• G14
• G32
• G34

Acknowledgments

We would like to thank all anonymous reviewers, the editor (Ali M. Kutan), and, in particular, Vladimir Atanasov, discussant of our research at the FMA conference (in 2016), for their invaluable comments. This article was presented at a number of international conferences, including the Financial Management Association European Conference, Hanken School of Economics, Helsinki, June 9–10, 2016; the 23rd Annual Conference of the Multinational Finance Society, Stockholm, June 26–29, 2016; the 4th International OFEL Conference, New Governance for Value Creation, Towards Stakeholding and Participation, Dubrovnik, April 15–16, 2016. Earlier drafts of this article were discussed at the 21st Annual Conference of the Multinational Finance Society, Prague, June 29–July 2, 2014; the 14th FRAP—Finance, Risk and Accounting Management Perspectives Conference, University of Oxford, Oriel College, September 22–24, 2014.

Supplemental Data

Supplemental data for this article can be accessed on the publisher’s website.

Notes

1. The method of sample selection and method of verifying whether the transaction involved a control transfer were described in detail by Byrka-Kita (2012). This study involved only the estimation of a control premium in public companies in the Polish capital market and ignored the issue of abnormal returns.

2. The Banzhaf voting power index, BZI, is another popular tool employed to estimate relative voting power (Banzhaf 1965). Edwards and Weichenrieder (2009) argue that use of the BZI when minority shareholders are strongly dispersed results in a situation where even a 5% share has a relative power of 100%.

3. The terms player and game reflect origins of power indices in game theory. In the context of ownership structure metrics, shareholders are the players, and the ballot in the general meeting is the game.

4. An overview of computing power indices and a description of the algorithms used is given in the article written by Dennis Leech (2002). Computer Algorithms for Voting Power Analysis by D. Leech and R. Leech sourced from http://homepages.warwick.ac.uk/~ecaae/ssocean.html#data_input on August 15, 2015.