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The Value of Control and the Costs of Illiquidity

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  • Albuquerque, Rui
  • Schroth, Enrique

Abstract

An inherent difficulty in valuing controlling blocks of shares is the illiquidity of the market. We explore the pricing implications associated with the illiquidity of controlling blocks of shares in the context of a search model of block trades. The model considers several dimensions of illiquidity. First, following a liquidity shock, the controlling blockholder is forced to sell, possibly to a less efficient acquirer. Second, this sale may occur at a fire sale price. Third, absent a liquidity shock, a trade occurs only if a potential buyer arrives. We use a structural estimation approach and U.S. data on trades of controlling blocks of public corporations to identify these dimensions of illiquidity. We obtain estimates of counter-factual valuations that would result in the absence of illiquidity, which are used to measure the blockholders' marketability and control discounts and the dispersed shareholders' illiquidity-spillover discount.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9090.

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Date of creation: Aug 2012
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Handle: RePEc:cpr:ceprdp:9090

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Keywords: control discount; Control transactions; corporate governance; illiquidity spillover; marketability discount; search frictions;

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