Large outside blockholders as monitors: Evidence from partial acquisitions

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 = 17.55%) around activist block purchases are significant both economically and statistically, suggesting the existence of monitoring benefits. Strategic block purchases also exhibit large returns (CAR = 15.46%), which reflect synergy benefits and may also be the result of potential monitoring advantages. In contrast, the CAR around financial block purchases (1.42%) is only marginally significant, 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.