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Chinese block transactions and the market reaction

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  • Bian, Jiangze
  • Wang, Jun
  • Zhang, Ge
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    Abstract

    This paper examines block transactions in the Chinese equity market. We find that most of the block transactions are traded at prices at or below the closing price of the regular continuous auction market, and more than half are traded at or below the lowest price of the day. Consistent with the price pattern indicating that the block transactions are seller-initiated, the overall market reaction is negative. However, we find a different market reaction to block transactions when the buyer is represented by China International Capital Corporation (CICC), the number one investment bank in China which counts many foreign institutional investors as its clients. The positive reaction is consistent with the buyer-certification hypothesis, that is, the fact that some smart institutional buyers enter block trade indicates the buyers' assessment of undervaluation.

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    Bibliographic Info

    Article provided by Elsevier in its journal China Economic Review.

    Volume (Year): 23 (2012)
    Issue (Month): 1 ()
    Pages: 181-189

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    Handle: RePEc:eee:chieco:v:23:y:2012:i:1:p:181-189

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    Web page: http://www.elsevier.com/locate/chieco

    Related research

    Keywords: Block trade; Chinese equity market; Market reaction;

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    References

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    1. Dyck, Alexander & Zingales, Luigi, 2002. "Private Benefits of Control: An International Comparison," CEPR Discussion Papers 3177, C.E.P.R. Discussion Papers.
    2. Clifford G. Holderness, 2003. "A survey of blockholders and corporate control," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 51-64.
    3. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Bessembinder, Hendrik & Venkataraman, Kumar, 2004. "Does an electronic stock exchange need an upstairs market?," Journal of Financial Economics, Elsevier, vol. 73(1), pages 3-36, July.
    5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    6. Huang, Zhangkai & Xu, Xingzhong, 2009. "Marketability, control, and the pricing of block shares," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 88-97, January.
    7. Keim, Donald B & Madhaven, Ananth, 1996. "The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 1-36.
    8. Madhavan, Ananth & Cheng, Minder, 1997. "In Search of Liquidity: Block Trades in the Upstairs and Downstairs Markets," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 175-203.
    9. Barclay, Michael J. & Holderness, Clifford G., 1989. "Private benefits from control of public corporations," Journal of Financial Economics, Elsevier, vol. 25(2), pages 371-395, December.
    10. Seppi, Duane J, 1990. " Equilibrium Block Trading and Asymmetric Information," Journal of Finance, American Finance Association, vol. 45(1), pages 73-94, March.
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