This paper examines the effect of block trades on equity share prices. We use a standard event study methodology taking the block deal date as the event date. We hand-collect a sample of 125 block deals transacted on the Bombay Stock Exchange during the period 2006 to 2012. Extant empirical literature suggests that block trades are usually accompanied by positive abnormal stock price performance. We also find evidence in support of the literature. Our results indicate that stock prices generally increase on average around 1.32% on the date of block deals. On the day of the block trade, a substantial percentage of companies, i.e., 77%, have a positive abnormal return which is by far the highest in the total event window period of 41 days. We also look at the persistence of abnormal returns around the date of block deals and find that cumulative average abnormal returns for smaller window periods are significantly positive. Therefore there appears to be a price run up before the block deals are transacted. This may be due to the market having prior knowledge about the block deals before they are actually transacted thus leading to insider trading. Since we find a very significant positive abnormal return on the transaction of block deals irrespective of whether it is buyer or seller initiated, we conclude that the Indian stock market perceives the transfer of a large chunk of shares to be value enhancing in as much as such transactions have a strong positive informational content probably because it envisages better monitoring of the firm by the block purchaser.

There are many small, medium and large companies listed on any given stock exchange. Each of these companies may have millions of shareholders which may each own relatively few shares. In percentage terms, their individual holdings are insignificant as to play any meaningful role in the working of the company. On the other hand, many of these public limited companies may have sizeable share blocks that are owned by the promoters and other non-promoter block holders in the form of institutional investors such as corporates, brokerage houses, mutual funds, pension funds, and private equity investors, etc., who often play an important role in the corporate governance of such companies. Small shareholders are the focus of the corporate governance system, with strong regulations often designed to protect their interests over those of large shareholders. Therefore in such a system a great deal of disclosure of corporate information is normally required by the law.

Outside block shareholders may be efficiently able to monitor the management of such companies and may also contribute by rendering expert advice leading to a reduction in agency problems between shareholders and managers. Reducing agency problems can lead to an increase in firm value as reflected by an increase in stock price. While phenomenal research work in the west has been concentrated in the area of corporate ownership and control, the developing economies have seen very less research in this area. The behavior of stock prices around large transfer of shares is of paramount importance for the market regulators on the one hand and for large institutional investors on the other. Market regulators are concerned with overseeing the fairness in transactions, ensuring liquidity and safeguarding the interests of investors particularly the smaller ones. Large institutional investors are concerned about the impact costs involved in undertaking large trades.

Applied Finance Journal, Price, Securities and Exchange Board of India (SEBI), Existing Empirical Evidence, Hypothesis, Block Trading, Bombay Stock Exchange.