Working Paper: CEPR ID: DP6742
Authors: Rui Albuquerque; Enrique Schroth
Abstract: Note: A substantially revised version of this paper has been published as CEPR DP7358, "Quantifying private benefits of control from a structural model of block trades." Please refer to DP7358 for the most up-to-date version.We study the determinants of private benefits of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb, and Panunzi (2000) explicitly dealing with the existence of both block premia and block discounts in the data. We find evidence that the occurrence of block premia and block discounts depends on the controlling block holder's ability to fight a potential tender offer for the target's stock. Private benefits represent 3% of the target firm's stock market value. Private benefits increase with the target's cash holdings and decrease with its short term debt providing evidence in favour of Jensen's free cash flow hypothesis. A counterfactual policy evaluation of the Mandatory Bid Rule suggests that it fails to add value to shareholders because it fails to prevent welfare decreasing transactions and, by forcing inefficient tender offers, it deters welfare increasing transactions.
Keywords: block pricing; block trades; control transactions; mandatory bid rule; private benefits of control; structural estimation
JEL Codes: G12; G18; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private benefits of control (D61) | target firm's stock market value (G34) |
| target's cash holdings (G32) | private benefits of control (D61) |
| short-term debt (H63) | private benefits of control (D61) |
| active shareholder as buyer (G34) | income diversion (J31) |
| control acquisition (G34) | perceived value (D46) |
| mandatory bid rule (D44) | market efficiency (G14) |