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Search Frictions and the Liquidity of Large Blocks of Shares

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Author Info

  • Rui Albuquerque

    (Boston University School of Management, ECGI, and CEPR)

  • Enrique Schroth

    (University of Amsterdam)

Abstract

This paper investigates empirically the illiquidity of majority blocks of shares in the context of a search model of block trades. The search model incorporates two aspects of illiquidity, or search frictions. First, upon a liquidity shock, the incumbent blockholders may be forced to sell to a less efficient buyer. Second, a block liquidity sale may occur at a fire sale price. We conduct a structural estimation of the model using data on majority block trades in the U.S. The structural estimation is particularly useful in this exercise as it allows us to evaluate the counterfactual price that would result absent liquidity shocks. Our results help shed light into the size of the marketability discount, the control discount and an illiquidity-spillover discount we identify, and on the determinants of aggregate liquidity.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-029/2/DSF11.

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Date of creation: 11 Feb 2011
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Handle: RePEc:dgr:uvatin:20110029

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Web page: http://www.tinbergen.nl

Related research

Keywords: Block pricing; marketability discount; liquidity; control transactions; search frictions; structural estimation;

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