The 'Lemons Effect' in Corporate Freeze-Outs
In a corporate freeze-out, the controller is required to compensate minority shareholders for the no-freezeout value of their shares that are taken from them. This paper seeks to highlight the difficulties involved in determining this no-freezeout value when private information. In particular, the analysis shows that the pre-freezeout market price of minority shares cannot be used an a proxy for the no-freezeout value that these shares would have in the absence of a freeze-out. It is shown that, under a regime in which frozen out minority shareholders receive a compensation equal to the pre-freezeout market price, the pre-freezeout market price will be set a level below the expected no-freezeout value of minority shares. The reason for this is a lemons effect' that arises when a controller uses her private information in deciding whether to affect a freeze-out. By showing how controllers are able to use their private information to affect freeze-outs at terms favorable to them, this paper demonstrates that freeze-outs can become a significant source for private benefits of control.
|Date of creation:||Feb 1999|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barclay, Michael J. & Holderness, Clifford G., 1989. "Private benefits from control of public corporations," Journal of Financial Economics, Elsevier, vol. 25(2), pages 371-395, December.
- 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.
- Lucian Arye Bebchuk, 1994. "Efficient and Inefficient Sales of Corporate Control," NBER Working Papers 4788, National Bureau of Economic Research, Inc.
- Kahan, Marcel, 1993. "Sales of Corporate Control," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 368-79, October.
- Benjamin E. Hermalin & Alan Schwartz, 1998.
"Buyouts in Large Companies,"
Yale School of Management Working Papers
ysm66, Yale School of Management.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:6938. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.