Michael J. Barclay

Private benefits from control of public corporations

We analyze the pricing of 63 block trades between 1978 and 1982 involving at least 5% of the common stock of NYSE or Amex corporations. These blocks are typically priced at substantial premiums to the post-announcement exchange price. We argue that the premiums, which average 20%, reflect private benefits that accrue exclusively to the blockholder because of his voting power. The premiums paid by both individual and corporate block purchasers increase with firm size, fractional ownership, and firm performance. Individuals pay larger premiums for firms with greater leverage, lower stock-return variance, and large cash holdings.

Effects of Market Reform on the Trading Costs and Depths of Nasdaq Stocks

The relative merits of dealer versus auction markets have been a subject of significant and sometimes contentious debate. On January 20, 1997, the Securities and Exchange Commission began implementing reforms that would permit the public to compete directly with Nasdaq dealers by submitting binding limit orders. Additionally, superior quotes placed by Nasdaq dealers in private trading venues began to be displayed in the Nasdaq market. We measure the impact of these new rules on various measures of performance, including trading costs and depths. Our results indicate that quoted and effective spreads fell dramatically without adversely affecting market quality. Copyright The American Finance Association 1999.

Announcement effects of new equity issues and the use of intraday price data

This paper examines the intraday market response to announcements of new equity issues. For fifteen minutes following the announcement, there is abnormally high volume and a -1.3% average return. There is also a small, but significant, negative average return in the hour before the announcement. Issue size, intended use of proceeds, and estimated profitability of new investment are uncorrelated with the announcement effect. After the issuance of new shares, there is a significant price recovery of 1.5%. This evidence is inconsistent with many theoretical rationales for the negative market reaction to new equity issue announcements.

Private benefits from block ownership and discounts on closed-end funds

The greater the managerial stock ownership in closed-end funds, the larger are the discounts to net asset value. The average discount for funds with blockholders is 14%, whereas the average discount for funds without blockholders is only 4%. This relation is robust over time and to various model specifications that control for other factors that affect discounts. We argue that blockholders receive private benefits that do not accrue to other shareholders and that they veto open-ending proposals to preserve these benefits. We support this argument by documenting a range of potential private benefits received by blockholders in closed-end funds.

On the Debt Capacity of Growth Options

If debt capacity is defined as the incremental debt optimally associated with an additional asset, then the debt capacity of growth options is negative. The underinvestment costs of debt increase and free cash flow benefits of debt fall with additional growth options. Thus, if firm value increases with additional growth options, then not only does leverage decline but the firms optimal total debt level declines as well. This result implies a negative relation between book leverage and growth options and provides a new economic interpretation of book leverage regressions.

Dividends, Taxes, and Common Stock Prices: The Ex-Dividend Day Behavior of Common Stock Prices Before the Income Tax

This study examines the ex-dividend day behavior of common stock prices before the enactment of the federal income tax. On ex-dividend days during the pre-tax period, stock prices fell, on average, by the full amount of the dividend. The data are consistent with the hypothesis that (i) investors in the pre-tax period value dividends and capital gains as perfect substitutes and (ii) the differential taxation of dividends and capital gains has since caused investors to discount the value of taxable cash dividends in relation to capital gains.

Private Placements and Managerial Entrenchment

Our evidence suggests that private placements of large-percentage blocks of common stock are often made to passive investors, helping management solidify their control of the firm. The purchasers’ passivity is documented though the rarity of their involvement in firm affairs, the absence of public conflict with management, and the paucity of post-placement acquisitions. Stock returns turn negative as the passivity and entrenchment is revealed; discounts to the purchasers appear to be compensation for the consequences of helping to entrench management. These conclusions conflict with the conventional wisdom that active purchasers of private placements provide valuable monitoring and certification services. ∗ Barclay is from the University of Rochester (barclay@simon.rochester.edu); Holderness is from Boston College (holderne@bc.edu); and Sheehan is from Pennsylvania State University (dps6@psu.edu). For their comments we thank Vladimir Atanasov, Gordon Hanka, Linda Miles, Jeffrey Pontiff, James Seward, and Karen Wruck. We thank Leslie DeSantis, Weihong Song, and Duncan Zhengs for research assistance. This research has been supported by a Research Incentive Grant from Boston College, which we gratefully acknowledge.

Bid-Ask Spreads and the Avoidance of Odd-Eighth Quotes on NASDAQ: An Examination of Exchange Listings

This paper examines 472 securities that were listed on Nasdaq and moved to the NYSE or Amex. When Nasdaq market makers avoid odd-eighth quotes, bid-ask spreads are large and decline dramatically with exchange listing. When market makers use both odd and even eighths, spreads are smaller and decline only slightly with exchange listing. The large spreads observed when Nasdaq market makers avoid odd-eighths cannot be explained by security-specific characteristics. Instead, the results support the conclusion that the avoidance of odd-eighth quotes is used as a coordination device among Nasdaq market makers to maintain supra-competitive bid-ask spreads.

The Law and Large-Block Trades

Although these issues have been analyzed by legal scholars since Andrew Berle and Gardiner Means in 1932, no systematic empirical evidence has been collected. We investigate the validity of this belief, as well as broader implications of the law on large-block trades, by analyzing 106 trades of at least 5% of common stock of exchange-listed firms between 1978 and 1982. We find that, when block sellers receive premium, stock prices typically increase but not to the price per share received by the blockholders. We argue that this tension is resolved by assigning a different set of rights and obligations to large-block shareholders when they act as managers.

Open-end mutual funds and capital-gains taxes

Despite the fact that taxable investors would prefer to defer the realization of capital gains indefinitely, most open-end mutual funds regularly realize and distribute a large portion of their gains. We present a model in which unrealized gains in the funds portfolio increase expected future taxable distributions, and thus increase the present value of a new investors tax liability. In equilibrium, managers interested in attracting new investors pass through taxable capital gains to reduce the overhang of unrealized gains. This model contains a number of empirical predictions that are consistent with data on actual fund overhangs.