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Determinants of the Block Premium and of Private Benefits of Control

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Author Info
Albuquerque, Rui
Schroth, Enrique

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Abstract

We study the determinants of private benefits of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb, and Panunzi (2000) explicitly dealing with the existence of both block premia and block discounts in the data. We find evidence that the occurrence of block premia and block discounts depends on the controlling block holder's ability to fight a potential tender offer for the target's stock. Private benefits represent 3% of the target firm's stock market value. Private benefits increase with the target's cash holdings and decrease with its short term debt providing evidence in favour of Jensen's free cash flow hypothesis. A counterfactual policy evaluation of the Mandatory Bid Rule suggests that it fails to add value to shareholders because it fails to prevent welfare decreasing transactions and, by forcing inefficient tender offers, it deters welfare increasing transactions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6742.

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Date of creation: Mar 2008
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Handle: RePEc:cpr:ceprdp:6742

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Related research
Keywords: Block pricing; block trades; control transactions; mandatory bid rule; market rule; private benefits of control; structural estimation;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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    Other versions:
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    Other versions:
  19. James Dow & Gary Gorton & Arvind Krishnamurthy, 2005. "Equilibrium Investment and Asset Prices under Imperfect Corporate Control," American Economic Review, American Economic Association, vol. 95(3), pages 659-681, June. [Downloadable!]
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  23. Bebchuk, Lucian Arye, 1994. "Efficient and Inefficient Sales of Corporate Control," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 957-93, November. [Downloadable!] (restricted)
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