1. The Pricing of Block Shares Zhangkai Huang & Xingzhong Xu Peking University

2. Block shares around the world La Porta (1999): 76% of listed companies in the developed economy have at least one share block larger than 10% of the total shares.

3. Trading off liquidity against control Control premium of block shares Barclay and Holderness (1989) Wruck (1989) Dyck and Zingales (2004) Zingales (1994) Nenova (2003)

4. Trading off liquidity against control Illiquidity Shleifer and Vishny (1986), Longstaff (1995), Kahl, Liu and Longstaff (2002) Silber (1991)

5. The pricing of block shares What is the joint effect of control premium and illiquidity on the pricing of block shares? We test this using data from listed companies in China

6. Block shares in China More than 60% of the shares are owned by the government and legal persons. These are not tradable in the market. However, block shares can be traded among government bodies and legal persons at negotiated prices. The quantity of the trade is usually large.

7. Hypothesis I The negotiated price of these non-tradable blocks has an inverted U shape with the size of the trade. The larger the transaction size, the larger the probability of holding control, the higher the price. However, when the size of the transaction becomes large enough, the effect of illiquidity will dominate, and the price will be lower.

8. Hypothesis II If the buyer gains control of the company after the transaction, he will pay a higher price, other things being equal.

9. Hypothesis III The existence of non-tradable shares generates severe liquidity constraints. The larger the fraction of shares that are non- tradable, the lower the price of negotiated blocks, other things being equal.

10. Methodology

11. Data CCER database 279 transactions in 2002 and 2003. Transactions between related parties, transactions of ST/PT shares are deleted.

12. Main descriptive statistics meanmedianminmax Price 0.26750.24640.06560.759 Size0.13960.10540.00040.6825 Ratio0.60400.61490.22240.9132

13. Main Results

14. Other results Impact of other variables on transaction price Buyer being private: positive Target company leverage: negative Target company size: positive Target company roe eps: positive

15. Other results We define market price as the average price between t=-30 and t=-60 When we try later dates, the transfer of control variable loses significance: this is evidence that for companies which experience control transfer, share prices rise before the transaction.

16. Conclusion Control premium has positive effects and block illiquidity has negative effects on the pricing of block shares as predicted by corporate finance theory.