IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Uncertain private benefits and the decision to go public

  • Ehrhardt, Olaf
  • Lahr, Henry

This paper focuses on the decision to go public when both seller and potential buyers have private benefits of control. The basic model by Zingales (1995) is extended to account for uncertainty of private benefits. This leads to new implications for the sales process, ownership structure, measurement of private benefits and the efficiency of takeover regimes. The optimal way to sell the company differs from the model with perfect information in that the incumbent always choses to go public instead of selling directly to a potential rival whenever the rival is expected to increase cash flow but not necessarily total firm value. IPO price and volume are lower than under perfect information which induces a socially non-optimal solution in takeover transactions. Imperfect information also explains post-IPO underperformance of firms which are not subject to control transfers. To compensate shareholders for potential losses during the sales process, the offering price has to be lower than under perfect information. This provides the basis for a differential stock price performance depending on the buyer taking over or not. Furthermore, an overestimation bias exists in prior estimates of control premiums, because some firms going public are never sold but nevertheless provide private benefits. Finally, mandatory tender offers in the form of a fair price rule and an equal opportunity rule are discussed, which indicate that the social superiority of either rule is strongly dependent on the empirical distribution characteristics of private benefits.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://econstor.eu/bitstream/10419/48414/1/577539965.pdf
Download Restriction: no

Paper provided by Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München in its series CEFS Working Paper Series with number 2008-02.

as
in new window

Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:zbw:cefswp:200802
Contact details of provider: Postal: Arcisstr. 21, 80333 München
Fax: 089 289 25070
Web page: http://www.cefs.de/

More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Bolton, P. & von Thadden, E.L., 1996. "Blocks, liquidity and corporate control," Discussion Paper 1996-80, Tilburg University, Center for Economic Research.
  2. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
  3. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
  4. Erik Berglöf & Mike Burkart, 2003. "European takeover regulation," Economic Policy, CEPR;CES;MSH, vol. 18(36), pages 171-213, 04.
  5. Sanford J. Grossman & Oliver D. Hart, 1987. "One Share/One Vote and The Market for Corporate Control," Working papers 440, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Lucian Arye Bebchuk, 1994. "Efficient and Inefficient Sales of Corporate Control," NBER Working Papers 4788, National Bureau of Economic Research, Inc.
  7. Kristian Rydqvist & Kenneth Högholm, 1995. "Going public in the 1980s: Evidence from Sweden," European Financial Management, European Financial Management Association, vol. 1(3), pages 287-315.
  8. Nicodano, Giovanna & Sembenelli, Alessandro, 2004. "Private benefits, block transaction premiums and ownership structure," International Review of Financial Analysis, Elsevier, vol. 13(2), pages 227-244.
  9. Cusatis, Patrick J. & Miles, James A. & Woolridge, J. Randall, 1993. "Restructuring through spinoffs*1: The stock market evidence," Journal of Financial Economics, Elsevier, vol. 33(3), pages 293-311, June.
  10. Eugene F. Fama, . "Market Efficiency, Long-term Returns, and Behavioral Finance," CRSP working papers 340, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  11. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
  12. Barclay, M.J. & Holderness, C.G. & Pontiff, J., 1991. "Private Benefits form Block Ownership and Discounts on Closed-end Funds," Papers 91-01, Rochester, Business - Financial Research and Policy Studies.
  13. A. Admati & P. Pßeiderer & J. Zechner, 2005. "Large shareholder activism, risk sharing, and financial market equilibrium," Public Economics 0502011, EconWPA.
  14. At, Christian & Morand, Pierre-Henri, 2000. "The choice of the voting structure for privatizing a company," Economics Letters, Elsevier, vol. 68(3), pages 287-292, September.
  15. Reuer, Jeffrey J. & Shen, Jung-Chin, 2004. "Sequential divestiture through initial public offerings," Journal of Economic Behavior & Organization, Elsevier, vol. 54(2), pages 249-266, June.
  16. Mello, Antonio S. & Parsons, John E., 1998. "Going public and the ownership structure of the firm," Journal of Financial Economics, Elsevier, vol. 49(1), pages 79-109, July.
  17. DeAngelo, Harry & DeAngelo, Linda, 1985. "Managerial ownership of voting rights : A study of public corporations with dual classes of common stock," Journal of Financial Economics, Elsevier, vol. 14(1), pages 33-69, March.
  18. Lucian Arye Bebchuk, 1999. "A Rent-Protection Theory of Corporate Ownership and Control," NBER Working Papers 7203, National Bureau of Economic Research, Inc.
  19. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 25-54, January.
  20. Ellingsen, Tore & Rydqvist, Kristian, 1997. "The Stock Market as a Screening Device and the Decision to Go Public," SSE/EFI Working Paper Series in Economics and Finance 174, Stockholm School of Economics.
  21. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
  22. Atanasov, Vladimir, 2005. "How much value can blockholders tunnel? Evidence from the Bulgarian mass privatization auctions," Journal of Financial Economics, Elsevier, vol. 76(1), pages 191-234, April.
  23. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
  24. Nenova, Tatiana, 2003. "The value of corporate voting rights and control: A cross-country analysis," Journal of Financial Economics, Elsevier, vol. 68(3), pages 325-351, June.
  25. Holderness, Clifford G. & Sheehan, Dennis P., 1988. "The role of majority shareholders in publicly held corporations : An exploratory analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 317-346, January.
  26. Dyck, Alexander & Zingales, Luigi, 2002. "Private Benefits of Control: An International Comparison," CEPR Discussion Papers 3177, C.E.P.R. Discussion Papers.
  27. Zingales, Luigi, 1995. "Insider Ownership and the Decision to Go Public," Review of Economic Studies, Wiley Blackwell, vol. 62(3), pages 425-48, July.
  28. Zingales, Luigi, 1994. "The Value of the Voting Right: A Study of the Milan Stock Exchange Experience," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 125-48.
  29. Stoughton, Neal M. & Zechner, Josef, 1998. "IPO-mechanisms, monitoring and ownership structure," Journal of Financial Economics, Elsevier, vol. 49(1), pages 45-77, July.
  30. Lucian Arye Bebchuk & Luigi Zingales, 1996. "Corporate Ownership Structures: Private versus Social Optimality," NBER Working Papers 5584, National Bureau of Economic Research, Inc.
  31. 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.
  32. Roell, Ailsa, 1996. "The decision to go public: An overview," European Economic Review, Elsevier, vol. 40(3-5), pages 1071-1081, April.
  33. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
  34. Harris, Milton & Raviv, Artur, 1989. "The design of securities," Journal of Financial Economics, Elsevier, vol. 24(2), pages 255-287.
  35. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  36. Harris, Milton & Raviv, Artur, 1988. "Corporate governance : Voting rights and majority rules," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 203-235, January.
  37. Ernst Maug, 1998. "Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control?," Journal of Finance, American Finance Association, vol. 53(1), pages 65-98, 02.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:zbw:cefswp:200802. 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: (ZBW - German National Library of Economics)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.