Working Paper: CEPR ID: DP1868
Authors: Mike Burkart; Denis Gromb; Fausto Panunzi
Abstract: This paper studies block trades and tender offers as alternative means for transferring corporate control in firms with a dominant minority blockholder and an otherwise dispersed ownership structure. Incumbent and new controlling parties strictly prefer to trade the controlling block. From a social point of view, however, this method is inferior to tender offers, because it preserves a low level of ownership concentration which induces more inefficient extraction of private control benefits. This discrepancy is caused by the free-riding behaviour of small shareholders. Moreover, the controlling block trades at a premium which reflects, in part, the surplus that the incumbent and the acquirer realize by avoiding a tender offer and the consequent transfer to small shareholders. Therefore, factors that alter the pay-offs of small shareholders in a tender offer (e.g. supermajority rules, disclosure rules and non-voting shares) also alter the block premium. Finally, the paper argues that greenmail, like block trading, enables the controlling parties to preserve low levels of ownership concentration and large private control benefits.
Keywords: block premia; tender offers; takeover regulation; greenmail
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| block trade (D74) | lower ownership concentration (G32) |
| lower ownership concentration (G32) | larger private benefits of control (G34) |
| tender offers (D44) | higher ownership concentration (G32) |
| higher ownership concentration (G32) | less inefficient extraction of private benefits (D61) |
| higher ownership concentration (G32) | higher firm value (G32) |
| supermajority rules and disclosure thresholds (G34) | block premium (Y60) |