The Determinants of the Block Premium and of Private Benefits of Control
Rui A. Albuquerque
Boston University - School of Management; Católica-Lisbon School of Business and Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
Enrique J. Schroth
City University London - Cass Business School
ECGI - Finance Working Paper No. 202/2008
Swiss Finance Institute Research Paper No. 08-21
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.
Number of Pages in PDF File: 72
Keywords: block pricing, block trades, control transactions, private benefits of control, market rule, mandatory bid rule, structural estimation
JEL Classification: G12, G18, G34working papers series
Date posted: March 4, 2008 ; Last revised: October 27, 2008
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