Block Investment and Partial Benefits of Corporate Control

Despite familiar arguments for diversification, many investors choose to hold significant blocks of equity in the same firm. While control benefits may explain majority blocks, most blocks are much smaller than what is generally considered necessary for control. This paper develops a theory whereby such blocks can confer to their holders partial benefits of control; in particular, small block shareholders can join together and form controlling coalitions. The implications of such a cooperative game among block shareholders for the shareholder structure within and across firms are examined. This paper predicts large investors will “create their own space” by staking out large enough blocks to deter other block investors, that there will be a threshold level above which large investors are not challenged, and that the shareholder structure across firms will exhibit a particular clientele effect among block shareholders. These predictions are consistent with a preliminary review of empirical evidence.