Chinese Block Transactions and the Market Reaction

This paper examines block transactions in 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. While the block transactions appear to be seller-initiated according to price, the market reaction is positive. The positive reaction is consistent with the buyer-certification hypothesis, that is, the fact that rational institutional buyers enter block trade indicates the buyers' assessment of undervaluation. This effect is stronger after April 20, 2008, when a new regulation is imposed to force large shareholders to use block trading platforms to dispose large quantity of shares