Working Paper: CEPR ID: DP9090
Authors: Rui Albuquerque; Enrique Schroth
Abstract: An inherent difficulty in valuing controlling blocks of shares is the illiquidity of the market. We explore the pricing implications associated with the illiquidity of controlling blocks of shares in the context of a search model of block trades. The model considers several dimensions of illiquidity. First, following a liquidity shock, the controlling blockholder is forced to sell, possibly to a less efficient acquirer. Second, this sale may occur at a fire sale price. Third, absent a liquidity shock, a trade occurs only if a potential buyer arrives. We use a structural estimation approach and U.S. data on trades of controlling blocks of public corporations to identify these dimensions of illiquidity. We obtain estimates of counter-factual valuations that would result in the absence of illiquidity that are used to measure the blockholders? marketability discount and the dispersed shareholders? illiquidity-spillover discount.
Keywords: control discount; control transactions; corporate governance; illiquidity spillover; marketability discount; search frictions
JEL Codes: G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity shocks (E44) | blockholders sell shares (G34) |
| blockholders sell shares (G34) | fire sale price (D44) |
| liquidity conditions (E41) | marketability discount (M31) |
| liquidity shocks (E44) | dispersed shareholders' pricing (G19) |
| liquidity shocks (E44) | fire sale price (D44) |