Whose Private Benefits of Control. Owners or Managers?

Transcription

1 Whose Prvate Benefts of Control Owners or Managers? Joon Ho Hwang Fnance Department Kelley School of Busness Indana Unversty 1309 East Tenth Street Bloomngton, IN August, 2004 ABSTRACT Ths paper emprcally decomposes prvate benefts of control nto two components: benefts accrung to managers and benefts accrung to owners. It documents that prvate benefts of control, as measured by block premum, ncreases slowly wth respect to the ownershp level, as measured by the percentage of shares acqured n block trade, but ncreases rapdly wth respect to the lkelhood of exercsng manageral control of the frm, as measured by the probablty of top executve turnover followng block trade. To llustrate, for a ten-percent block trade, the block premum s 1.20%, 5.75%, 12.80% f there s a zero-percent, twenty fve-percent, ffty-percent lkelhood of subsequent top executve turnover, respectvely. Ths ndcates that managers enjoy more prvate benefts than owners. * I thank my advsor Utpal Bhattacharya valuable gudance and comments. I also thank Neal Galpn, Crag Holden, Robert Jennngs, Inmoo Lee, Wendy Lu, and Xaoyun Yu, for helpful comments. All errors reman my responsblty.

2 A vast fnance lterature studes prvate benefts of control. Yet most studes are vague about who s actually enjoyng these prvate benefts of control. That s, prevous lterature has not clearly defned whether t s the owners (majorty shareholders) of the company or t s the managers of the company who are enjoyng the prvate benefts. For example, Benos and Wesbach (2003) defne prvate benefts of control as benefts that accrue to managers or shareholders that have control of the corporaton, but not to mnorty shareholders. 1 Decomposng prvate benefts nto those accrung to managers and those accrung to owners may not be necessary n the case of famly-owned frms whch come close to where ownershp and control are not separated (Ehrhardt and Nowak (2003)). But n the majorty of modern US frms, where ownershp and control are separated, and where the control of the frm has been delegated to managers, we need to be more careful n defnng who actually enjoys prvate benefts of control. Ths paper emprcally examnes where the prvate benefts of control are comng from whether they are arsng from havng block ownershp of the frm or from havng manageral control of the frm. Among studes on prvate benefts of control, some have focused on managers as the benefcary of prvate benefts of control. Jensen and Mecklng (1976) note the perqustes enjoyed by top executves. Jensen (1986) shows how managers use ther control rghts to engage n projects that beneft managers rather than nvestors. Benos and Wesbach (2003) state The ablty of managers to take resources from ther frms as prvate benefts s an mportant factor n corporate fnance Also, exorbtant compensaton packages gven out to executves have been mentoned n recent corporate 1

3 corruptons nvestgatons. 2 Fnally, studes on managers resstance to takeovers cte prvate benefts of control as a major reason for ther resstance. On the other hand, block owners of a frm also have the benefts of enjoyng corporate benefts that are not shared wth mnorty shareholders, and have an ncentve to use ther votng rghts to consume corporate resources to ther advantage. For example, they can pay excessve salares and bonuses to ther own board members, they can extract prvate benefts through self-dealng transactons, they can transfer assets to other companes under ther control, or they can dlute the nterests of mnorty shareholders by acqurng addtonal shares at a preferental prce. As for studes whch deal wth prvate benefts of control accrung to owners, La Porta et al. (1999) state that, the central agency problem n large corporatons around the world s that of restrctng expropraton of mnorty shareholders by controllng shareholders Studes such as La Porta et al. (1999) and Johnson et al. (2000) focus on tunnelng, whch ncludes actvtes rangng from outrght theft to sellng assets or products at hgher than market prce to a frm n whch a shareholder has a bg stake, or buyng at a low prce from the frm. Demsetz and Lehn (1985) argue there are also non-pecunary benefts or amenty benefts accrung to the owners of companes n meda, entertanment, and sports ndustres. Most emprcal studes (e.g. Barclay and Holderness, (1989)) that try to measure prvate benefts of control estmate benefts accrung to the controllng owner of the frm and not to the managers of the frm. In ths study, I decompose prvate benefts of control nto benefts accrung to owners and benefts accrung to managers. Hypothetcally, pure owners of the frm are people who are owners of a company, but do not exercse any manageral nfluence n the frm. And pure managers 2

4 are people who manage the frm wthout havng any ownershp of the frm. It s mpossble to quantfy prvate benefts of control enjoyed by pure owners and pure managers for two reasons. Frst, though t s possble to fnd pure managers, t s mpossble to fnd pure owners. Ths would not be a problem f ther sources of prvate benefts are dfferent (for example, a pure manager s prvate benefts may arse from earnng excessve salares and a pure owner s prvate benefts may arse from havng amenty benefts from beng an owner of a frm). However, ther sources of prvate benefts may also be the same (for example, resources could be dverted from shareholders to a company whch a manager or an owner has a stake n.) To crcumvent the above problems, I focus on large shareholders n ths paper. A large shareholder s a mxture of an owner and a manager, because large shareholders often are powerful enough to exert nfluence over managers. That s, large shareholders, n addton to beng owners, vary n degree as to how much manageral nfluence they have. Whle t s easy to measure the ownershp level by lookng at the percentage of shares acqured n the block trade, t s dffcult to quantfy the level of manageral control exercsed by the owner. Among dfferent manageral nfluences whch blockholders can have, one of the most sgnfcant actons s to replace the top executve of the company. 3 In fact, Holderness and Sheehan (1988) fnd that many corporate majorty shareholders place ther representatves n top management poston. In vew of that, I quantfy the level of manageral control exercsed by the owner by the lkelhood of top executve turnover wthn one year after the block trade. Ths measure s created by frst examnng whether there was a top executve turnover wthn one year of the block transacton and 3

5 then constructng an mpled probablty of a top executve turnover at the tme of the block trade. To decompose prvate benefts of control nto ownershp-related and manageral control-related, I frst measure prvate benefts of ownershp by estmatng the margnal effect of the percentage of shares acqured on the block premum. Second, I measure prvate benefts from havng manageral control of the frm by estmatng the margnal effect of the probablty of manageral turnover on the block premum. The above two tasks are acheved by usng a two-stage smultaneous equaton model, where both the block premum and the top executve turnover varables are treated to be endogenous varables. The core of the analyss s a 3-D demonstraton that shows how prvate benefts of control changes wth respect to both the ownershp level and the lkelhood of the blockholder s manageral control of the frm. It shows that prvate benefts of control, as measured by block premum, ncreases slowly wth respect to the ownershp level, whch s measured by the percentage of shares acqured n the block trade, but ncreases rapdly wth respect to the lkelhood of exercsng manageral control of the frm, whch s measured by the probablty of top executve turnover wthn one year after the block trade. In addton, prvate benefts are more senstve to the acqured ownershp level when the lkelhood of manageral control n the frm s hgher. To llustrate n numbers, for a ten-percent block trade, the block premum s 1.20% f there s a zero-percent lkelhood of a subsequent top executve turnover, the block premum s 5.75% f there s a twenty fve-percent lkelhood of a subsequent top 4

6 executve turnover, and the block premum s 12.80% f there s a ffty-percent lkelhood of subsequent top executve turnover. However, for a twenty-percent block trade, the block premum s 2.38% f there s a zero-percent lkelhood of a subsequent top executve turnover, the block premum s 9.68% f there s a twenty fve-percent lkelhood of a subsequent top executve turnover, and the block premum s 19.48% f there s a ffty-percent lkelhood of subsequent top executve turnover. All of these results, whch can be summarzed by the 3-dmensonal graph showng the relatonshp among prvate benefts of control, block ownershp, and the lkelhood of the blockholder s manageral control of the frm, show that shareholders engagng n block trades value manageral control more than the level of ownershp. Ths ndcates that prvate benefts of control come more from managng the company than from just ownng the company. The rest of the paper s organzed as follows. In Secton 1, I dscuss the related lterature on the measurement of prvate benefts of control. Secton 2 descrbes the data and descrptve statstcs. The decomposton of prvate benefts of control nto ownershp-related and manageral control-related s examned n Secton 3. Secton 4 concludes. 1. Exstng lterature on measurng prvate benefts of control As a controllng party s able to use corporate resources to hs beneft only f t s dffcult or mpossble to prove these actons n court, prvate benefts of control are nherently dffcult to measure. Two dfferent approaches have been proposed n the lterature to estmate the sze of prvate benefts. 5

7 The frst approach studes the prcng of control blocks or large-percentage blocks of shares. Barclay and Holderness (1989) estmate prvate benefts of control by measurng the dfference between the prce per share pad for large-percentage blocks of common stock and the market prce of the shares after the block transacton. Ther reasonng s as follows. If all shareholders receve benefts n proporton to ther fractonal ownershp, blocks should trade at the exchange prce. But f blockholders can use ther votng power to secure benefts that do not accrue to mnorty shareholders, then blocks wll trade at a premum to the post-announcement exchange prce. 4 Ther measure of block premum s used as an estmate of prvate benefts of control. They fnd that the block premum averages 16 percent (medan s 16 percent) of the post-announcement exchange prce and 4.3 percent (medan s 2.1 percent) of the total market value of the frm s equty. In subsequent studes that measure block premums, Mkkelson and Regassa (1991) report an average premum of 9.2 percent (medan s 5.5 percent) of the exchange prce for a sample of thrty-seven trades between 1978 and Ncodano and Sembenell (2000), n a study of Italan companes, document average premum of 27 percent (medan s 8.3 percent). Dyck and Zngales (2003) study 412 control transactons n 39 countres between 1990 and 2000 and document that the value of control ranges from 4% of frm value n Japan to +65% of frm value n Brazl. They conclude that on average, corporate control s worth 14% of the equty value of a frm. The second way of measurng prvate benefts of control s by comparng prces of shares wth dentcal dvdend rghts but wth dfferent votng rghts,.e. by examnng dual class shares. Here the votng premum s used to estmate prvate benefts of control. Ths approach has been used n studes of Lease, McConnell and Mkkelson (1983, 6

8 1984), DeAngelo and DeAngelo (1985), Zngales (1995), Nenova (2003), and Dodge (2003). Nenova (2003) fnds that the value of control ranges from about 0% of the frm market value n Denmark to 50% n Mexco. Zngales (1995) estmates that the average votng premum s 82% n Italy compared to 10.5% n the U.S., and he argues that the dfference n premum reflects the dfference n the levels of corporate governance n the two countres. Dodge (2003) fnds that non-u.s. frms that cross-lst on U.S. stock exchanges have votng premums that are on average 43% lower than other non-u.s. frms that do not cross-lst. He argues that mgratng to a hgher governance standard settng reduces prvate benefts of control. 2. Data A. Data Formaton I collect block trades over the perod 1987 to 2002 from the SDC Mergers and Acqustons database. Transactons must nvolve a transfer of a block of shares that comprses 5% or more of the shares outstandng and are classfed as block purchase n the acquston technque category of the SDC Mergers and Acqustons database. 5% s the cutoff pont used for measurng block premum because t s the pont that trggers a mandatory flng to the SEC wth regard to a block transacton. Thus block trades n my sample do not always represent the largest blocks at these frms. My ntal sample sze s 1,767. There must be nformaton about prce pad per share for the block transacton and the exchange prce one day after the announcement of the block trade. Thus I exclude cases where the prce pad per share may not be valued objectvely, such as transactons 7

9 nvolvng convertble bonds, labltes, optons, warrants, etc. After ths screen, sample sze s reduced to 1,140. To rule out the cases where the transacton prce may not reflect prvate benefts of control, I exclude cases where ether the target or the acqurer s a subsdary of the other party, or s a government. I further exclude transactons that are open market repurchases, tender offers, spnoffs, recaptalzatons, self-tenders, exchange offers, repurchases, and acquston of remanng nterest. Also, to stay away from block trades that have any takeover motves, I rule out block trades that happen wthn sx months pror to a merger or acquston concernng the block tradng company. These screenng processes reduced the number of my sample frms to 811. The partes of the block transacton can ether be an nsder or an outsder of the company. Barclay and Holderness (1989) note that purchasers of the trade are typcally outsders, and not one of the frm's drectors or offcers. In my ntal sample, only 2.6% of the trades nvolve nsder purchasers. I restrct my sample to only those block transactons where both partes are not afflated wth the company. The reason behnd ths selecton crtera s that t s ambguous as to how accurately the block transacton wll reflect prvate benefts of control when nsders take part n the transacton. For example, nsders purchasng a block of shares may already have manageral and/or ownershp control of the frm n whch case they wll not pay extra for the block. In the case of nsder sellng a block, he may stll have a sgnfcant manageral/ownershp control of the frm after the trade that he does not have to worry about losng hs prvate benefts. Or at the other extreme, he may lose both manageral and ownershp control 8

10 (possbly to the purchasng party) by losng hs block of shares. By focusng on outsder purchasers, I am able to conduct a cleaner measurement of prvate benefts of control. 5 Ths screenng reduced my sample sze to 784. I also dentfy several characterstcs of equty ownershp structure and of board composton from the sample frm s proxy statement wth the most recent record date pror to the block transacton. These further screens reduced my sample sze to ts fnal number, 756. I search the LexsNexs Company Profles to dentfy top executve turnovers wthn one year after the block transacton. Smlar to prevous studes, top executve n ths study s defned as the CEO or, f a frm has no CEO, as the presdent. There are 5 frms n my sample that do not have a CEO and have the poston of presdent. As n most studes (e.g., Wesbach (1988) and Dens, et al. (1997)), I exclude top executve turnovers that are part of the normal retrement process and those related to death or llness. The crteron for the normal retrement s that the manager s between the ages of 64 and 66. These cases are ncluded n my sample frms but are not counted as turnovers. 6 B. Summary Statstcs Table 1 reports descrptve statstcs for dfferent ownershp structures and board composton characterstcs for 756 sample frms and for frms categorzed between those that had top executve turnover wthn one year of the block transacton and those that dd not. [Table 1 Approxmately Here] 9

11 Block premum s computed by takng the dfference between the prce per share pad for the block and the exchange prce one day after the announcement of the transacton. Percentage block premum s thus defned as follows. ( Prce per share pad for the block) ( one day after exchange prce) % Block Premum 100 one day after exchange prce The percentage block premum averages 9.42% for the whole sample. Ths fgure s smaller than the average block premum of 16% reported by Barclay and Holderness (1989). The dfference may arse from the dfference n sample perod, whch covers the perod n the case of Barclay and Holderness (1989) and n ths study. Also, by usng the SDC database, I am able to construct 756 sample block trades whereas Barclay and Holderness (1989) searches Wall Street Journal to dentfy 63 block trades. Therefore, my sample wll nclude more of less dramatc block trades snce Wall Street Journal reports only news worthy events. For trades that are followed by top executve turnover wthn one year of the block trade, the premum averages 18.1% whereas for those that do not have subsequent top executve turnover wthn one year of the block trade, t averages only 6.8%. The dfference s sgnfcant at the 1% level. Ths dfference n the block premum ndcates that there may be benefts to havng manageral nfluence on the frm over and above the benefts of just ownng a block of shares of the frm. Also, more shares are beng acqured for block trades that have subsequent top executve turnover. Ths mples that the acqurer may be more lkely to have manageral nfluence n the frm as he holds more shares of the frm. 10

12 Table 1 also dsplays that, on average, nsders control 5.39% of the frm s shares n my sample. Insder ownershp ncludes those shares owned by ndvduals related to a member of the top management team, employee penson or stock opton plans, trusts for whch managers have some votng authorty, and any other blocks of shares over whch a member of the top management team has votng authorty. By way of comparson, Morck et al. (1988) report that average ownershp of all offcers and drectors s 10.6% n a sample of 371 Fortune 500 frms and Mkkelson and Partch (1989) report an average nsder ownershp of 19.6% n a random sample of New York and Amercan Stock Exchange frms. Consstent wth prevous studes, nsders hold less shares and frms have worse performance for those frms that experence top executve turnover. But wth respect to the fracton of frms wth outsder domnated boards and the fracton of frms where the top executve s a member of the foundng famly, I do not fnd sgnfcant dfference between frms wth top executve turnover and frms wthout top executve turnover wthn one year of the block trade. As for the frms board composton, fracton of cases where the acqurer s an ndvdual, and the average nsttutonal ownershp, there are almost no dfferences between the sample of block trades that have top executve turnover wthn one year of the block trade and those that do not. 3. Results A. Determnants of Block Premum 11

13 Table 2 shows the results of a cross-sectonal regresson of block premums usng the followng model. Block premum = α + β ( percentage of shares acqured) + β log( frm sze) 3 + β ( leverage) + β ( bank acqurer dummy) 7 + β ( top executve turnover dummy) β ( acqurer β ( pror + β ( tangblty of assets) 5 β ( ndustry dummes) j s n the 2 same ndustry dummy) + β ( ndvdual acqurer dummy) + frm performce) 6 β ( year dummes) h Possble factors that can affect the premum can be categorzed nto those that reflect the characterstcs of the block, characterstcs of the purchaser, characterstcs of the seller, and whether the block trade nvolves manageral control of the frm. [Table 2 Approxmately Here] A1. Characterstcs of the block Larger fractonal ownershp gves the blockholder more nfluence n terms of havng greater votng rghts. Larger ownershp also provdes greater protecton from a hostle takeover or proxy contest. Beyond a certan pont, however, few addtonal prvate benefts wll result from ncreased fractonal ownershp f the blockholder holds suffcent amount of shares. There are also costs to ownng a large porton of shares, such as ncurrng montorng costs or sufferng from an undversfed portfolo n the case of ndvdual blockholders. Ths means that blockholders tend not to accumulate shares beyond a threshold. If the threshold vares by frm, there may be no dscernble relaton between fractonal ownershp and block premum. Barclay and Holderness (1989) and Dyck and Zngales (2003) have shown that there s a postve relatonshp between block 12

14 premum and the sze of shares acqured. My Table 2 also shows that premums tend to be larger as the fractonal sze of a block ncreases. When I nclude the square term of the percentage of shares acqured, ts coeffcent s not sgnfcant at conventonal levels. A2. Characterstcs of the purchaser (acqurer) Prvate benefts of control can be dfferent wth respect to whether the owner s an ndvdual or a corporaton. On one hand, ndvduals, compared to corporate blockholders, have an added beneft of havng control or ownershp of the frm by beng able to consume perqustes (Demsetz and Lehn (1985)). On the other hand, corporate blockholders care more about ganng access to a frm s producton technology n order to take advantage of synerges or economes of scale wth ther own producton. Holderness and Sheehan (1988) fnd that block premums are larger for ndvduals than they are for corporatons. I, however, fnd that ndvdual acqurers are assocated wth smaller, although not statstcally sgnfcant, block premums. In the case where the acqurer s a corporaton, there may be more benefts to the acqurer f t s n the same ndustry as the target company. Thus, I nclude a dummy varable that takes a value of one when the acqurng company s n the same ndustry group as the target. The results ndcate that premum s hgher when the acqurer s n the same ndustry group as the target, but t s not statstcally sgnfcant. If the acqurer s a fnancal company, there may not be large prvate benefts of control nvolved n block trades because fnancal companes may acqure shares manly for fnancal reasons. Fnancal companes may lack manageral control motves for 13

15 purchasng shares n ths case. Thus, I nclude a dummy varable that takes the value of 1 when the acqurer s a fnancal company. Results n Table 2 show that the premum s ndeed lower when banks purchases block of shares, but t s not statstcally sgnfcant. A3. Characterstcs of the seller (target) Sze of prvate benefts wll be greater f the frm s performng well and smaller f the frm s havng fnancal dffcultes. Thus, I nclude pror year s market-adjusted stock return, whch s defned as the percentage of common stock return for the 12 months endng two months before the block trade announcement mnus the return on the CRSP equal-weghted ndex. I obtan qualtatvely smlar results when I use the CRSP valueweghted ndex. In both cases, the block premum s statstcally larger for frms that had better performance. Block premum should ncrease wth frm sze because larger frms offer potentally larger benefts, both pecunary and nonpecunary. And snce llqud stocks are more lkely to be sold at a dscount, the postve relatonshp between block premum and sze can also be based on the theory that frm sze s a proxy for the lqudty of the stock. On the other hand, costs of beng a blockholder also ncrease wth frm sze, as larger frms are lkely to be montored more closely by securty analysts, government offcals, and nsttutonal nvestors. I measure frm sze as the logarthm of the book value of total assets. Results n Table 2 show that the effect of frm sze on block premum s not sgnfcant. Results do not change f I measure frm sze as the market value of equty plus the book value of debt. 14

16 The sze of debt may affect the sze of block premum. However, pror relatonshp between prvate benefts and debt s not clear. Debt can have a negatve effect on prvate benefts by constranng access to free cash flow (Jensen (1986)). In contrast, debt can also ncrease one s effectve control over corporate assets (Harrs and Ravv (1988), Stulz (1988)). Leverage s measured as the book value of debt over book value of assets, and t turns out nsgnfcant n my results. Prvate benefts may dffer across ndustres. Demsetz and Lehn (1985) suggest that companes n meda, entertanment, and sports ndustres have hgher prvate benefts of control. I capture ndustry dfferences by categorzng target companes nto ther major ndustry group based on the two-dgt SIC code. Manufacturng (frst two dgts of the SIC code s 20-39) s the most common ndustry group and s the excluded category. Other than retal trade ndustry group dummy, whch s margnally sgnfcant at the 10% level, other ndustry dummy varables turn out to be nsgnfcant. Results are stll nsgnfcant when I assgn ndustry dummes to frms n meda, entertanment, and sports ndustres. 7 Prvate benefts of control may also be related to the tangblty of assets of the frm. The hgher the tangblty of assets, the lower wll be the premum because acqurers wll have more dffculty n dvertng resources f assets are ted down and easly observable. Dyck and Zngles (2003) show a negatve but nsgnfcant relatonshp between block premum and the tangblty of assets n ther nternatonal study. In Table 2, I fnd a negatve and margnally sgnfcant relatonshp between block premum and the tangblty of assets, whch s measured as fxed assets over total assets. 15

17 A4. Manageral Control by the Blockholder To dstngush between the prvate benefts of ownng and managng the company from those of just ownng the company, I use top executve turnover event wthn one year after the block trade as gaugng the manageral control exercsed by the blockholder. Holderness and Sheehan (1988) show that for trades of majorty blocks of stock, 71% of the trades nvolve turnovers among the three top managers wthn one year of the trade and conclude that many corporate majorty shareholders place ther representatves n top management poston. I assume that block premums whose trades are followed by top executve turnover wthn one year reflect the prvate benefts of managng the company n addton to ownng the company; and I assume that block premums whose trades are not followed by top executve turnover wthn one year only reflect the prvate benefts of just ownng the company. Therefore, I nclude a dummy varable for block trades whch are followed by top executve turnover n the frm wthn one year of the block trade. My results show that block premums are ndeed larger for trades that are followed by the change n top executve. The expected block premum goes up by more than 8% for trades that have subsequent top executve turnover n the frm wthn one year of the block trade. In general, my results n Table 2 are consstent wth the results of Barclay and Holderness (1989) and Dyck and Zngales (2003). I fnd that premums tend to be larger as the fractonal sze of the block ncreases, as frm performance before the trade ncreases. What s new n Table 2 s that the block premum s greater f the top executve s replaced followng the block transacton. Ths suggests that there may be prvate 16

18 benefts of control from havng manageral control of the frm (as reflected by the postve coeffcent of the top executve turnover) over and above the benefts of control from havng just the ownershp of the frm (as reflected by the coeffcent of the percentage of shares acqured). B. Determnants of top executve turnover A possble shortcomng of the approach used n the prevous secton s the endogenety of the top executve turnover varable. Prevous lterature have found that pror frm performance, ownershp structure, board composton, and the status of top executve all affect the lkelhood of top executve turnover. That s, there are greater ncentves to replace a top executve under certan crcumstances and blockholders can capture value from dong so. However, the actual ablty to exert nfluence and to replace the top executve vares among dfferent blockholders. Thus, n ths secton, I estmate the blockholder s nfluence to replace the top executve condtonal on the value of replacng. Later n Secton 4.3, I measure how the block premum changes wth respect to ths mpled probablty of a top executve turnover. By followng ths approach, I am able to capture both the ablty to exert nfluence (replace the top executve) and the ncentve to capture value from dong so. 8 To carry out ths task, I dentfy several characterstcs of equty ownershp structure and of board composton from the sample frm s proxy statement wth the most recent record date pror to the block transacton. 17

19 Studes (e.g. Wesbach (1988), Yermack (1996), Dens, Dens, and Sarn (1997)) have found that the probablty of top executve change s negatvely related to pror frm performance and the ownershp stake of offcers and drectors, and postvely related to the presence of an outsde blockholder. Table 3 estmates logt models relatng the probablty of top executve turnover to frm performance, ownershp characterstcs, and other potental determnants of turnover. Model 1 s the basc model whereas model 2 ncludes nteracton terms between pror frm performance and ownershp structure varables shown to nfluence the lkelhood of management turnover. Numbers n Table 3 refer to margnal effects where dervatves are evaluated at mean values. MODEL1 : Top executve turnover dummy + β ( percentage of shares acqured) + β log( frm sze) 2 + β ( top exec. s foundng famly dummy) 5 3 = α + β ( pror frm performce) + β ( nsder ownershp) + β ( outsder domnated board dummy) MODEL 2 : Top executve turnover dummy + β ( percentage of shares acqured) + β log( frm sze) 2 + β ( dummy for 5% < ( nsder ownershp) < 25%) 4 + β ( dummy for ( nsder ownershp) > 25%) 5 + β ( outsder domnated board dummy) 7 + β ( pror frm performce) 8 + β ( pror frm performce) 9 + β 10 ( pror frm performce) 3 = α + β ( pror frm performce) ( dummy for ( nsder ownershp) > 25%) ( outsder domnated board dummy) ( dummy for 5% < ( nsder ownershp) < 25%) + β ( top exec. s foundng famly dummy) 6 1 [Table 3 Approxmately Here] B1. Block sze A blockholder who owns a greater proporton of a frm s shares has more votng power n the company. A blockholder also has more ncentve to work towards value- 18

20 ncreasng actvtes as he holds more shares of the frm. I thus nclude the percentage of shares acqured n the block trade as an explanatory varable for the top executve turnover. Results n Table 3 confrm that block sze s postvely assocated wth the lkelhood of a top executve turnover. To see f there s a threshold at whch the block s large enough to assure top executve turnover, I also run a pecewse lnear regresson where the block sze varable s dvded nto two varables at the cutoff pont of 50%. The results for the pecewse lnear regresson show that both block sze varables are sgnfcant. Although the sgnfcance level for the coeffcent of block sze s weaker once the percentage of shares acqured reaches 50%, the dfference between the two coeffcents are not statstcally sgnfcant. B2. Characterstcs of ownershp structure More manageral shareholdngs may better algn the nterests of managers and shareholders, and provde managers wth a greater ncentve to nvest n frm-specfc human captal. (Jensen and Mecklng (1976), DeAngelo and DeAngelo (1985)) On the other hand, t can also entrench management such that t makes t more dffcult to transfer control and to remove a manager. (See, for example, Stulz (1988) for a theoretcal study and Mkkelson and Partch (1989) for an emprcal work) 9 Emprcally, studes have shown that there s generally a negatve relatonshp between management turnover and the ownershp of offcers and drectors. (Ofek (1993), Mkkelson and Partch (1996), Dens, et al. (1997)) Table 3 shows results whch are consstent wth prevous studes; hgher the nsder ownershp, less the lkelhood of top management change. 19

21 Also, the exstence of outsde blockholder that own nontrval amounts of a frm s equty may reduce the degree of manageral entrenchment assocated wth a gven level of manageral ownershp (Shlefer and Vshny (1986)). Further, Dens, et al. (1997) show that top executve turnover s postvely related to the presence of an outsde blockholder. Dens et al. (1997) show that the exstence of outsder blockholder nfluences the relatonshp between the lkelhood of top executve turnover and the frm s past performance. But snce my sample frms are restrcted to those whose shares are purchased n block by the outsders of the frm, every frm n my sample have outsde blockholders. Thus, I do not nclude ths varable n my regresson. B3. Characterstcs of board composton Studes (e.g. Brckley et al. (1994), Byrd and Hckman (1991), Wesbach (1988)) suggest that nternal montorng s mproved by havng a hgher fracton of ndependent outsder drectors. Followng the classfcaton used by Wesbach (1988) and Dens et al. (1997), I dstngush frms wth outsder-domnated board when the company s board contans at least 60% outsders. 10 My results n Table 3 ndcate that havng outsderdomnated board alone does not affect the lkelhood of top management turnover. Ths s consstent wth Wesbach (1988) and Dens et al. (1997). B4. Status of the top executve Accordng to Morck et al. (1988), manager s status as the founder of the frm may be conducve to manageral entrenchment. Dens, et al. (1997) show emprcally that the top executve s less lkely to be replaced f he or she s a member of the foundng famly. 20

22 However, my results n Table 3 show that the top executve s status as the founder of the frm has only margnal effect on the probablty of hm or her beng replaced for my sample of frms. B5. Pror frm performance Results n Table 3 show that the probablty of top management turnover s negatvely related to pror frm performance, whch s measured as the percentage of common stock return for the 12 months endng two months before the block trade announcement mnus the return on the CRSP equal-weghted ndex. I obtan qualtatvely smlar results when I use the CRSP value-weghted ndex. Ths result s consstent wth prevous studes; worse the performance, more lkely s the lkelhood of top executve turnover. In Model 2 of Table 3, I follow Morck et al. (1998) and Dens et al. (1997) and classfy frms nto three categores of manageral ownershp: less than or equal to 5%, between 5% and 25%, and greater than 25%. 11 I then examne how nsder ownershp and outsder domnated boards affect the senstvty of top executve turnover to performance, as done by Dens et al. (1997) and Wesbach (1988). 12 Dens et al. (1997) fnd a weaker relatonshp between performance and turnover n frms wth hgh nsder ownershp. The exstence of outsder domnated board s found to have a sgnfcant nfluence on the senstvty of turnover to performance n Wesbach (1988), whereas t s shown to be nsgnfcant n Dens, et al. (1997). 21

23 Results of Model 2 n Table 3 show that frms that have nsder ownershp greater than 25% have 55% lower lkelhood of top management beng replaced. Frms that have nsder ownershp between 5% and 25% lower the probablty of top management change by 22%, although t s only margnally sgnfcant. My regresson results also show that nsder ownershp has a sgnfcant mpact on the senstvty of turnover to performance. The probablty of turnover s sgnfcantly negatvely related to performance when nsder ownershp s less than 5%. However, the sgnfcant postve coeffcent on the nteracton of RET wth the dummy varable denotng nsder ownershp between 5% and 25% ndcates that the probablty of turnover s sgnfcantly less senstve to performance for frms n ths ownershp category. In fact, the relatonshp between top executve turnover and past performance becomes statstcally nsgnfcant for frms wth nsder ownershp between 5% and 25%. These results are consstent wth the fndngs of Dens et al. (1997). Surprsngly, I fnd that frms wth outsder-domnated boards have less senstvty of top management turnover to performance. Ths result s contrary to that of Wesbach (1988), whch fnds a stronger assocaton between pror performance and the probablty of a top executve turnover for companes wth outsder-domnated boards. C. Two-stage logt regresson After provdng an estmate of the blockholder s nfluence to replace the top executve condtonal on the value of replacng, I now measure how the block premum changes wth respect to ths mpled probablty of a top executve turnover. I run a 22

24 smultaneous equaton model where the frst equaton has a dchotomous endogenous varable (top executve turnover) and the second equaton has a contnuous endogenous varable (block premum). I use a two-stage estmaton method descrbed n Maddala (1983) for smultaneous equaton models n whch one of the endogenous varable s contnuous and the other endogenous varable s dchotomous. The basc model s Frst Equaton : Top executve turnover dummy( T/ O) + β ( percentage of 2 shares acqured) + β log( frm sze) + β ( top exec. s foundng famly dummy) 5 = α + β ( pror frm performce) β ( nsder ownershp) + β ( outsder domnated board dummy) 6 4 Second Equaton Block premum = α + β ( percentage of + β log( frm sze) + β ( ndvdual acqurer dummy) + β ( acqurer β ( ndustry dummes) j : s n the 1 + β ( leverage) 4 + same ndustry dummy) + β ( bank acqurer dummy) + β ( T/ O) β ( year dummes) h shares acqured) + β ( pror + β ( tangblty of assets) frm performce) Two-stage regresson results for block premum are shown n Table 4. Ths s the man table n the text. Model 1, the basc model, ncludes the probablty of top executve turnover varable (T/O1) from Model 1 of Table 3 as an explanatory varable. Model 2 ncludes the probablty of top executve varable (T/O2) from Model 2 of Table 3 as an explanatory varable. [Table 4 Approxmately Here] 23

25 Both the percentage of shares acqured and the probablty of management turnover sgnfcantly affect the block premum. The postve coeffcent of the percentage of shares acqured mples that there are prvate benefts of control from havng ownershp of the frm. Accordng to Model 1, ownng 20% more shares of the frm ncreases the block premum by about 2.6%. The postve coeffcent of the probablty of top executve turnover varable ndcates that there are prvate benefts of control from havng manageral control of the company over and above the level comng from just ownng the company. In the case of gong from havng no chance of top executve turnover wthn a year of the block trade to havng 100% chance of top executve turnover wthn a year of the trade, the block premum jumps by more than 9%. Consderng the average block premum of 9.42%, ths suggests that n cases where the blockholder s certan to exercse manageral control of the frm, most of the prvate benefts of control are comng from havng manageral power of the frm. Results for the control varables are mostly smlar to those n Table 2, whch treats top executve turnover as exogenous. The coeffcents of bank acqurer dummy, frm sze, leverage, and same ndustry acqurer dummy reman nsgnfcant. Coeffcent of the tangblty of assets varable s sgnfcantly negatve, as n Table 2. What s dfferent from Table 2 are the coeffcents to the ndvdual acqurer dummy varable and the pror frm performance varable. In Table 2, I fnd that ndvdual acqurers are assocated wth smaller, albet not statstcally sgnfcant, block premums. In Table 4, the coeffcent of ndvdual acqurer dummy s postve and sgnfcant at the 10% level. Ths s consstent wth Holderness and Sheehan (1988), whch fnd that block premums are larger for ndvduals than they are for corporatons. Ths also supports the argument 24

26 of Demsetz and Lehn (1985) that ndvduals, compared to corporate blockholders, have an added beneft of havng control or ownershp of the frm by beng able to consume perqustes. As for the pror frm performance varable, t s no longer a sgnfcant determnant of block premum. Ths s dfferent from Table 2, where pror frm performance was margnally postvely assocated wth block premum. In Model 3 and 4, I nclude the nteracton term between the percentage of shares acqured and the probablty of top executve turnover. Model 3 uses the probablty of top executve turnover as defned n Model 1 of Table 3, and Model 4 uses the probablty of top executve turnover as defned n Model 2 of Table 3. Whle the sgnfcances of other varables are smlar to results n prevous models, the nteracton term s sgnfcant at a 10% level n Model 3 and sgnfcant at a 5% level n Model 4. Ths suggests that the prvate benefts from havng ownershp and prvate benefts of havng manageral control renforce each other. That s, havng more ownershp of the frm ncreases the prvate benefts f t results n more lkelhood of havng manageral control of the frm as well. Also, greater lkelhood of exertng manageral control of the frm ncreases prvate benefts f blockholder holds more shares of the frm. I nclude a square term of the probablty of top executve turnover and the percentage of shares acqured n Model 5. The square term of the probablty of top executve turnover s statstcally sgnfcant at the 5% level whereas the square term of the percentage of shares acqured s not sgnfcant. Thus, block premum s ncreasng at an ncreasng rate wth respect to the mpled lkelhood of a top executve change. But 25

27 block premum does not ncrease at an ncreasng rate wth respect to the fracton of shares acqured. Ths suggests that the prvate benefts of control ncreases at an ncreasng rate as the new blockholder s more lkely to exercse manageral control of the frm, but does not ncrease at an ncreasng rate as hs ownershp level grows. Fgure 1 captures the essence of ths paper. It shows a 3-dmensonal plot depctng the relatonshp among block premum, percentage of shares acqured, and the probablty of top executve turnover accordng to Model 5 of Table 4. As can be seen n the graph, prvate benefts of control, as measured by the block premum, s ncreasng slowly wth respect to the ownershp level, as measured by the percentage of shares acqured, and ncreasng rapdly wth respect to the lkelhood of manageral control, as measured by the probablty of top executve turnover wthn one year of the block trade. To gve a numercal example, I estmate block premum as a functon of percentage of shares acqured n the block when the mpled probablty of top executve turnover s 25 percent, and all the other ndependent varables reman constant at ther average values. I re-estmate ths functon when the mpled probablty of top executve turnover s 75 percent, and all the other ndependent varables reman constant at ther average values. The two functons are depcted n Fgure 2. The slope of the graph when the probablty of top executve turnover s at 25 percent level s +0.39, whereas the slope s when the probablty of turnover s at 75 percent level. Ths means that though the prvate benefts of control from havng ownershp of the frm ncreases as the level of ownershp ncreases, the rate of ths ncrease ncreases as the probablty og management turnover ncreases. In ths example, the senstvty ncreases more than two folds from 26

28 0.39 to Assumng that the percentage of shares acqured n the block transacton s 14.22% (whch s the average n our sample), the estmated block premum for ths sze s 7.41% when there s 25% lkelhood of top executve turnover. Ths block premum jumps to 26.33% when there s a 75% lkelhood of top executve turnover. Table 5 shows the average block premums and the senstvtes of block premum to the percentage of shares acqured for varous probabltes of top executve turnover wthn one year of the block trade, gven the average percentage of shares acqured n the block transacton of 14.22%. The senstvty of block premum to the percentage of shares acqured s the regresson coeffcent of the percentage of shares acqured varable, gven a certan probablty of top executve turnover, when I ft block premums on sgnfcant varables accordng to the regresson Model 5 of Table 4. Results n Table 5 ndcate that both the prvate benefts of control and the senstvty of prvate benefts of control to ownershp ncreases as the lkelhood of manageral control the blockholder s expected to have ncreases. [Table 5 Approxmately Here] In Table 6, I calculate values of block premum for dfferent values of block sze and dfferent values of the probablty of top executve turnover wthn a year of the block transacton, accordng to Model 5 of Table 4 and holdng other ndependent varables at ther means. [Table 6 Approxmately Here] 27

29 For a ten-percent block trade, the block premum s 1.20% f there s a zeropercent lkelhood of a subsequent top executve turnover, the block premum s 5.75% f there s a twenty fve-percent lkelhood of a subsequent top executve turnover, and the block premum s 12.80% f there s a ffty-percent lkelhood of subsequent top executve turnover. However, for a twenty-percent block trade, the block premum s 2.38% f there s a zero-percent lkelhood of a subsequent top executve turnover, the block premum s 9.68% f there s a twenty fve-percent lkelhood of a subsequent top executve turnover, and the block premum s 19.48% f there s a ffty-percent lkelhood of subsequent top executve turnover. Thus, block premum ncreases at an ncreasng rate wth respect to the probablty of top executve turnover, holdng everythng else constant. However, wth respect to the percentage of shares acqured, block premum ncreases at a constant rate, holdng everythng else constant. For example, for block trades that have twenty fve-percent probablty of top executve turnover, the block premum s 5.75% for a block trade wth ten-percent block sze, the block premum s 9.68% for a block sze of twenty-percent, and the block premum s 13.61% for a thrty-percent block sze. These numbers, along wth the 3-dmensonal graph n Fgure 1, llustrate the fact that prvate benefts of control s a convex functon of the lkelhood of exercsng manageral control of the frm, and s a lnear functon of the amount of havng ownershp of the frm. These results ndcate that block tradng partes value the lkelhood of havng manageral control of the frm more than they value the amount of ownershp n the frm. Ths n turn mples that managers have more prvate benefts of control than owners. 28

30 4. Concluson I decompose prvate benefts of control nto benefts accrung from havng ownershp of the frm and benefts accrung from havng manageral control of the frm. I show that prvate benefts of control ncrease slowly wth respect to havng more ownershp of the frm, but ncreases rapdly wth respect to havng more manageral control of the frm. Ths suggests that managers have more prvate benefts of control than owners. To the extent that weak shareholder rghts brng out agency costs (e.g., weak shareholder rghts reduce the lkelhood of takeover and hnder the removal of ncompetent management, whch n turn cause manageral shrkng, perqustes consumpton, or empre buldng) and that hgher agency costs are assocated wth greater prvate benefts of control enjoyed by the agent, ths study suggests that ssues on mprovng shareholder rghts should focus more on those who actually have manageral control of the frm, rather than lookng at all the large owners of the frm. 29

31 [References] Anderson, Ronald C., and D. Scott Lee, 1997, Ownershp studes: The data source matters, Journal of Fnancal and Quanttatve Analyss 32, Barclay, Mchael J., and Clfford G. Holderness, 1989, Prvate benefts from control of publc corporatons, Journal of Fnancal Economcs 25, Barclay, Mchael J., and Clfford G. Holderness, 1991, Negotated block trades and corporate control, Journal of Fnance 25, Barclay, Mchael J., Clfford G. Holderness, and Denns P. Sheehan, 2001, The block prcng puzzle, Workng Paper, Boston College. Benos, Evangelos, and Mchael S. Wesbach, 2003, Prvate benefts and cross-lstngs n the Unted States: A survey of recent research estmatng prvate benefts and the role of cross-lstngs as a bondng mechansm, Workng Paper, Unversty of Illnos. Brckley, James A., Jeffrey L. Coles, and Rory L. Terry, 1994, Outsde drectors and the adopton of poson plls, Journal of Fnancal Economcs 35, Byrd, John W., and Kent A. Hckman, 1991, Do outsde drectors montor managers? Evdence from tender offer bds, Journal of Fnancal Economcs 32,

32 Coughlan, Anne. T., and Ronald M. Schmdt, 1985, Executve compensaton, manageral turnover, and frm performance: An emprcal nvestgaton, Journal of Accountng and Economcs 7, Cotter, James F., and Marc Zenner, 1994, How manageral wealth affects the tender offer process, Journal of Fnancal Economcs 35, DeAngelo, Harry, and Lnda DeAngelo, 1985, Manageral ownershp of votng rghts, Journal of Fnancal Economcs 14, Demsetz, Harold, and Kenneth Lehn, 1985, The structure of corporate ownershp: causes and consequences, Journal of Poltcal Economy 93, Dens, Dens J., Dane K. Dens, and Atulya Sarn, 1997, Ownershp structure and top executve turnover, Journal of Fnancal Economcs 45, Dodge, Crag, 2004, U.S. cross-lstngs and the prvate benefts of control: Evdence from dual-class frms, Journal of Fnancal Economcs 72, Dyck, Alexander, and Lug Zngales, 2004, Prvate benefts of control: An nternatonal comparson, Journal of Fnance 59,

33 Ehrhardt, Olaf, and Erc Nowak, 2003, Prvate benefts and mnorty shareholder expropraton (or What exactly are prvate benefts of control?), EFA 2003 Annual Conference Paper No Franks, Julan R., and Coln P. Mayer, 1990, Corporate ownershp and corporate control: A study of France, Germany, and the UK, Economc Polcy 10, Grossman, Sanford, and Olver Hart, 1988, One share-one vote and the market for corporate control, Journal of Fnancal Economcs 20, Hart, Olver, 1983, The market mechansm as an ncentve scheme, Bell Journal of Economcs 14, Holderness, Clfford G, 2003, A survey of blockholders and corporate control, FRBNY Economc Polcy Revew, Aprl Holderness, Clfford G., and Denns P. Sheehan, 1988, The role of majorty shareholders n publcly held corporatons, Journal of Fnancal Economcs 20, Jensen, Mchael C., 1986, Agency costs of free cash flow, corporate fnance, and takeovers, Amercan Economcs Revew 76,

34 Jensen, Mchael C., and Wllam H. Mecklng, 1976, Theory of the frm: Manageral behavor, agency costs, and ownershp structure, Journal of Fnancal Economcs 3, Jensen, Mchael C., and Rchard S. Ruback, 1983, The market for corporate control: The scentfc evdence, Journal of Fnancal Economcs 11, 5-50 Johnson, Smon, Rafael La Porta, Florenco Lopez-de-Slanes, and Andre Shlefer, 2000, Tunnelng, Amercan Economc Revew 90, La Porta, Rafael, Florenco Lopez-de-Slanes, and Andre Shlefer, 1999, Corporate ownershp around the world, Journal of Fnance 54, Lease, Ronald, John McConnell, and Wayne Mkkelson, 1983, The market value of control n publcly traded corporatons, Journal of Fnancal Economcs 11, Lease, Ronald, John McConnell, and Wayne Mkkelson, 1984, The market value of dfferental votng rghts n closely held corporatons, Journal of Busness 57, Maddala, G.S., Lmted-Dependent and Qualtatve Varables n Econometrcs (Cambrdge Unversty Press, Cambrdge, MA.). 33

35 Mkkelson, Wayne, and Megan Partch, 1989, Managers votng rghts and corporate control, Journal of Fnancal Economcs 25, Mkkelson, Wayne, and Megan Partch, 1997, The declne of takeovers and dscplnary manageral turnover, Journal of Fnancal Economcs 44, Mkkelson, Wayne, and Halu Regassa, 1991, Premums pad n block transactons, Manageral and Decson Economcs 12, Morck, Randall, Andre Shlefer, and Robert W. Vshny, 1988, Management ownershp and market valuaton: An emprcal analyss, Journal of Fnancal Economcs 20, Nenova, Ttana, 2003, The value of corporate votng rghts and control: A cross-country analyss, Journal of Fnancal Economcs 68, Ncodano, Govanna, and Alessandro Sembenell, 2000, Prvate benefts, block transacton premums and ownershp structure, Workng Paper, Unversty of Turn. Ofek, El, 1993, Captal structure and frm response to poor performance: An emprcal analyss, Journal of Fnancal Economcs 34, 3-30 Shlefer, Andre, and Robert W. Vshny, 1986, Large shareholders and corporate control, Journal of Poltcal Economy 94,

36 Stulz, René, 1988, Manageral control of votng rghts: Fnancng polces and the market for corporate control, Journal of Fnancal Economcs 20, Warner, Jerold B., Ron Watts, and Karen Wruck, 1988, Stock prces and top management changes, Journal of Fnancal Economcs 20, Mchael S. Wesbach, 1988, Outsde drectors and CEO turnover, Journal of Fnancal Economcs 20, Zngales, Lug, 1994, The value of the votng rghts: A study of the mlan stock exchange, Revew of Fnancal Studes 7,

37 1 As another example, Grossman and Hart (1988) defne prvate benefts of control as the benefts current management or the acqurer obtan for themselves, but that the target securty holders do not obtan. 2 For example, see "Publc Skeptcal of Corporate Corrupton Crackdown" Washngton Tmes (04/19/04) 3 More extreme case of the blockholder s nfluence on the frm would be to engage n takeover of the frm. But n ths case, my sample of block transactons can be corrupted wth takeover transactons, or wth transactons that have takeover motves. 4 They measure the premum usng the post-announcement prce, because the prce that follows the announcement wll ncorporate the expected effect of the transacton. 5 Another possble reason for not usng trades that nvolve nsders may be that nsders may be more nformed, thus purchasng undervalued shares and sellng overvalued shares. But ths s not much of a concern snce the benchmark I use for measurng the block premum s the post-announcement prce, whch s a prce when the publc ncorporates all the nformaton about the block transacton, ncludng the dentty of the tradng partes. 6 If I exclude frms wth CEO turnovers happenng at retrement age or occurrng due to llness, my sample sze becomes 625. Results are qualtatvely smlar usng ths reduced sample, although some results are weaker. 7 These frms are those that have the frst two dgts of the SIC code as 27,48, 78,79 or the frst three dgts of the SIC code as I thank the referee for mprovng my descrpton on dealng wth endogenety ssue. 36

38 9 Entrenched management may be mmune to the dscplne of the product market (Hart (1983)), montorng by large shareholders (Shlefer and Vshny (1986)), and valueenhancng takeovers (Jensen and Ruback (1983), Franks and Mayer (1990)). 10 A drector s an outsde drector when she s not an employee of the company, has no famly connecton wth the management of the company, nor has any busness dealngs wth the company. 11 Dens et al. (1997) also use other cutoff ponts as a robustness test and fnd that the senstvty of turnover to performance changes sgnfcantly at the 5% cutoff pont but t does not matter much for the upper cutoff pont, as long as t s between 15% and 30%. 12 As for other nteracton varables, studes generally fnd nsgnfcant coeffcent terms when they use the nteracton term between performance and a contnuous nsder ownershp varable and when they use squared nsder ownershp varable nteracted wth performance. Dens et al. (1997) fnds that when they use the ownershp of only the top executve, the relatonshp between turnover and past performance s sgnfcant only when the top executve ownershp s less than 1% of the frm s shares. 37

39 38

40 Table 1 Summary Statstcs Ths table gves means and medans of several varables for 756 frms whose blocks are traded between 1987 and Block trades are dentfed through the SDC Mergers and Acquston database. Frms belong to subsequent CEO T/O group f there s a turnover n the top executve poston of the frm wthn one year after the block trade. Incdence of top executve turnover s found through the search of the LexsNexs Company Profles. Percentage block premum s defned as 100*{(prce per share pad for the block) (exchange prce one day after the announcement of the transacton)} / (exchange prce one day after the announcement of the transacton). Pror frm performance s the percentage of common stock return for the 12 months endng two months before the block trade announcement mnus the return on the CRSP equal-weghted ndex. Outsder domnated board dummy s a dummy varable that takes a value on one when the board has more than 60% of ts drectors who are outsders of the company. Top exec s foundng famly dummy varable s a dummy varable that takes the value of 1 when the top executve s a member of the foundng famly. Insder holdng varable s the percentage of shares owned by offcers and drectors and ncludes those shares owned by ndvduals related to a member of the top management team, employee penson or stock opton plans, trusts for whch managers have some votng authorty, and any other blocks of shares over whch a member of the top management team has votng authorty. Percent of shares acqured s the percentage of shares acqured n the block transacton. Transacton value s the number of shares acqured n the block transacton multpled by the tradng prce of the block. Leverage s measured as the book value of long-term debt over book value of assets. Indvdual acqurer dummy s a dummy varable that takes the value of 1 when the acqurer s an ndvdual. Data on block premum, percentage of shares acqured, transacton value, ndvdual purchaser dummy, total asset, market value of equty are from SDC Mergers and Acquston database. Data on leverage are from Compustat for the year pror to the block transacton. Data on pror frm performance s from CRSP. Data on board and ownershp structure are from the last proxy statements (accordng to the record date) pror to the block trade. Dollar values are n mllons. Sgnfcant dfferences for two groups are ndcated at the ten-, fve- and one-percentage levels by *, **, and *** respectvely accordng to the Wlcoxon rank-sum test. no subsequent CEO whole sample Subsequent CEO T/O T/O mean medan mean medan mean medan Dfference n mean block premum (%) *** frms wth postve premum (%) pror frm performance (%) *** outsder domnated board dummy top exec s foundng famly dummy nsder holdng (%) * percent of shares acqured (%) ** transacton value (ml) total asset (ml) leverage Indvdual acqurer dummy board sze nsttutonal ownershp (%) sample sze

41 Table 2 Determnants of Block Premum Table 2 shows the results of a cross-sectonal regresson of block premums. Block premum (%) s defned as 100*{(prce per share pad for the block) (exchange prce one day after the announcement of the transacton)} / (exchange prce one day after the announcement of the transacton). Percentage of shares acqured s the percentage of shares acqured n the block transacton. Pror frm performance s the percentage of common stock return for the 12 months endng two months before the block trade announcement mnus the return on the CRSP equal-weghted ndex. Log of frm sze s the natural logarthm of book value of assets. Leverage s measured as the book value of long-term debt over book value of assets. Tangblty of assets s [(fxed assets)/(total assets)]*100. Bank acqurer dummy s a dummy varable that takes the value of 1 when the acqurer s a fnancal company. Acqurer s n the same ndustry dummy s a dummy varable that takes a value of one when the acqurng company s n the same ndustry group as the target. Top executve turnover dummy s a dummy varable that takes the value of one f the frm whose shares were traded n a block experenced a top executve turnover wthn one year after the block trade. Incdence of top executve turnover s found through the search of the LexsNexs Company Profles. Major ndustry group dummes based on the two-dgt Standard Industral Classfcaton (SIC) code and year dummes (not reported) are ncluded n the regresson. Data on block premum, percentage of shares acqured, transacton value, ndvdual purchaser dummy, total asset, market value of equty are from SDC Mergers and Acquston database. Data on leverage and tangblty of assets are from Compustat for the year pror to the block transacton. Data on pror frm performance s from CRSP. Data on board and ownershp structure are from the last proxy statements (accordng to the record date) pror to the block trade. Sgnfcant coeffcents are ndcated at the ten-, fve- and one-percentage levels by *, **, and *** respectvely. Independent varables Dependent var. : block premum (%) coeffcent p-value percentage of shares acqured (%) 0.09*** 0.00 pror frm performance (%) 0.002* 0.10 log of frm sze (ml) leverage tangblty of assets (%) -0.16* 0.09 ndvdual acqurer dummy bank acqurer dummy acqurer s n the same ndustry dummy top executve turnover dummy 8.13** 0.04 ndustry - agrculture, forestry, fshng ndustry - mnng ndustry - constructon ndustry - transportaton and utlttes ndustry - wholesale trade ndustry - retal trade 3.26* 0.08 ndustry - fnance, nsurance, real est ndustry - servces

42 Table 3 Determnants of Top Executve Turnover Table 3 estmates logt models relatng the probablty of top executve turnover to frm performance, ownershp characterstcs, and other potental determnants of turnover. Numbers are margnal effects where dervatves are evaluated at mean values. Dependent varable s the top executve turnover dummy varable, whch takes the value of one f the frm whose shares were traded n a block experenced a top executve turnover wthn one year after the block trade. Incdence of top executve turnover s found through the search of the LexsNexs Company Profles. Pror frm performance s the percentage of common stock return for the 12 months endng two months before the block trade announcement mnus the return on the CRSP equal-weghted ndex. Frm sze s the natural logarthm of book value of assets. Insder ownershp varable s the percentage of shares owned by offcers and drectors and ncludes those shares owned by ndvduals related to a member of the top management team, employee penson or stock opton plans, trusts for whch managers have some votng authorty, and any other blocks of shares over whch a member of the top management team has votng authorty. Top exec f foundng famly varable s a dummy varable that takes the value of 1 when the top executve s a member of the foundng famly. Outsder domnated board s a dummy varable that takes a value on one when the board has more than 60% of ts drectors who are outsders of the company. Data on total asset, market value of equty are from SDC Mergers and Acquston database. Data on pror frm performance s from CRSP. Data on board and ownershp structure are from the last proxy statements (accordng to the record date) pror to the block trade. Dollar values are n mllons. P-values are n parentheses. Sgnfcant coeffcents are ndcated at the ten-, fveand one-percentage levels by *, **, and *** respectvely. Independent varables pror frm performance(%) (RET) percentage of shares acqured (%) log of frm sze (ml) nsder ownershp (%) dummy for 5% < (nsder ownershp) < 25% dummy for (nsder ownershp) > 25% top exec s foundng famly dummy outsder domnated board dummy RET * [dummy for 5% < (nsder ownershp) < 25%] RET * [dummy for (nsder ownershp) > 25%] RET * [outsder domnated board dummy] Dep var : top executve turnover Model 1 Model ** ** (0.02) (0.01) 0.051** 0.049** (0.04) (0.04) * * (0.07) (0.07) ** (0.04) * (0.09) ** (0.03) * * (0.07) (0.08) (0.64) (0.56) 0.011** (0.04) (0.18) 0.006** (0.03) 41

43 Table 4 Two Stage Regresson of Block Premum Table 4 shows the results of a two-stage regresson model of estmatng block premum, treatng the probablty of top executve turnover as endogenous. Probablty of top executve turnover s the mpled probablty of management turnover at the tme of the block trade and s created from a logt regresson of Table 3. Ths probablty s then multpled by 100. Probablty of executve turnover_1 s the mpled probablty of turnover from Model 1 n Table 3. Probablty of executve turnover_2 s the mpled probablty of turnover from Model 2 n Table 3. Block trades are dentfed through the SDC Mergers and Acquston database. Incdence of top executve turnover s found through the search of the LexsNexs Company Profles. Block premum (%) s defned as 100*{(prce per share pad for the block) (exchange prce one day after the announcement of the transacton)} / (exchange prce one day after the announcement of the transacton). Percentage of shares acqured s the percentage of shares acqured n the block transacton. Indvdual s a dummy varable that takes the value of 1 when the acqurer s an ndvdual. Bank acqurer dummy s a dummy varable that takes the value of 1 when the acqurer s a fnancal company. Log of frm sze s the natural logarthm of book value of assets. Leverage s measured as the book value of long-term debt over book value of assets. Pror frm performance s the percentage of common stock return for the 12 months endng two months before the block trade announcement mnus the return on the CRSP equal-weghted ndex. Tangblty of assets s [(fxed assets)/(total assets)]*100. Acqurer s n the same ndustry dummy s a dummy varable that takes a value of one when the acqurng company s n the same ndustry group as the target. Major ndustry group dummes based on the twodgt Standard Industral Classfcaton (SIC) code and year dummes are ncluded n the regresson (not reported). Data on block premum, percentage of shares acqured, ndvdual purchaser dummy, and total asset are from SDC Mergers and Acquston database. Data on leverage are from Compustat for the year pror to the block transacton. Data on pror frm performance s from CRSP. Dollar values are n mllons. P-values are n parentheses. Sgnfcant coeffcents are ndcated at the ten-, fve- and one-percentage levels by *, **, and *** respectvely. Independent varables Dependent varable: block premum (%) Model 1 Model 2 Model 3 Model 4 Model 5 percentage of shares acqured (%) (Block) 0.129** 0.140** 0.096** 0.098** 0.118** (0.04) (0.04) (0.03) (0.04) (0.03) ndvdual acqurer dummy 2.325* 2.658* 1.881* 1.790* 1.884* (0.09) (0.10) (0.09) (0.11) (0.09) bank acqurer dummy (0.29) (0.26) (0.27) (0.24) (0.24) log of frm sze (ml) (0.66) (0.69) (0.78) (0.75) (0.67) leverage * * (0.10) (0.11) (0.09) (0.10) (0.09) pror frm performance (%) (0.18) (0.14) (0.15) (0.14) (0.13) tangblty of assets (%) * ** ** ** ** (0.06) (0.04) (0.04) (0.03) (0.03) acqurer s n the same ndustry dummy (0.13) (0.17) (0.11) (0.15) (0.11) [prob of top executve turnover_1] (T/O1) 0.092** 0.073** (0.01) (0.02) [prob of top executve turnover_2] (T/O2) 0.095** 0.041** 0.022** (0.02) (0.02) (0.02) [prob of top executve turnover_2] ** (0.04) [percentage of shares acqured] (0.46) Block * T/O * (0.08) Block * T/O ** 0.011** (0.03) (0.04) 42

44 Table 5 Average mpled block premum and the senstvty of block premum to the percentage of shares acqured for dfferent probabltes of top executve turnover Ths table calculates block premums and the senstvty of block premum to the percentage of shares acqured. I ft percentage block premums on sgnfcant varables accordng to the regresson Model 5 of Table 4, gven dfferent values to the mpled probablty of top executve turnover and when all the other ndependent varables reman constant at ther average values. Block premum (%) s defned as 100*{(prce per share pad for the block) (exchange prce one day after the announcement of the transacton)} / (exchange prce one day after the announcement of the transacton). The senstvty of block premum to the percentage of shares acqured s the coeffcent of the percentage of shares acqured varable n the ftted equaton, gven a certan probablty of top executve turnover. Prob. of top executve turnover Block premum (%) Senstvty of block premum to the percentage of shares acqured 0% 1.70% % 3.68% % 6.86% % 7.41% % 15.62% % 26.33% % 33.96% % 39.54%

45 Table 6 Average percentage block premums for dfferent block szes and the probabltes of top executve turnover Ths table calculates block premums accordng to Model 5 of Table 4, gven dfferent values of the block sze (percentage of shares acqured) and the mpled probablty of top executve turnover, whle holdng other varables at ther means. prob of top executve turnover block sze as a percentage of frm's equty

46 Fgure 1 Relatonshp between block premum, percentage of shares acqured, and the probablty of top executve turnover Fgure 1 shows a 3-dmensonal plot depctng the relatonshp among block premum, percentage of shares acqured, and the probablty of top executve turnover accordng to Model 5 of Table prob_ turno ver ck _s ze 80 blo Block premum 120

47 Fgure 2 Relatonshp between block premum and the percentage of shares acqured, when the probablty of top executve turnover s 75% versus 25%. Fgure 2 shows block premum as a functon of percentage of shares acqured n the block when the mpled probablty of top executve turnover s 25 percent and 75 percent, respectvely, and all the other ndependent varables reman constant at ther average values. Percentage block_premum Prob of turnover = 75% Prob of turnover = 25% Percentage block sze 46