Block Share Purchases and Corporate Performance


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. IT IS NOW WELL UNDERSTOOD that the hostile takeovers and leveraged buyouts of the 1980s were typically followed by improvements in shareholder value and profitability.1 Less well understood, but even more frequent, were attempts by activist minority investors to inf luence corporate policy and performance. By our count, 33 percent of the firms on the 1980 Fortune 500 list experienced an attempt by an activist minority investor to inf luence policy in the 1980s, whereas only 9 percent experienced a leveraged buyout and 8 percent experienced a hostile takeover. The decade of the 1990s has seen hostile takeover and leveraged buyout activity subside. Activist investors, however, continue their efforts to inf luence corporate policy. In recent years, activist investors such as Carl Icahn, Kirk Kerkorian, Bennett LeBow, and Bob Monks have purchased significant blocks of stock and have lobbied for *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 ref lect those of the Securities and Exchange Commission or Commission staff. 1 See Bhagat, Shleifer, and Vishny (1990), Kaplan (1989), Kaplan and Stein (1993), and Muscarella and Vetsuypens (1990). THE JOURNAL OF FINANCE • VOL LIII, NO. 2 • APRIL 1998


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