The Determinants of the Block Premium and of Private Benefits of Control

Rui Albuquerque and Enrique Schroth
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Rui Albuquerque: Boston University, CEPR and ECGI
Enrique Schroth: University of Lausanne and Swiss Finance Institute

No 08-21, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: 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 favor 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; private benefits of control; market rule; mandatory bid rule; structural estimation (search for similar items in EconPapers)
JEL-codes: G12 G18 G34 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2008-03, Revised 2014-10
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0821

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