Block Premia in Transfers of Corporate Control

CEPR Discussion Paper No. 1868

Posted: 18 Aug 1998

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Denis Gromb

HEC Paris

Fausto Panunzi

Bocconi University - Department of Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Date Written: April 1998

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.

JEL Classification: G32

Suggested Citation

Burkart, Mike C. and Gromb, Denis and Panunzi, Fausto, Block Premia in Transfers of Corporate Control (April 1998). CEPR Discussion Paper No. 1868. Available at SSRN: https://ssrn.com/abstract=108210

Mike C. Burkart (Contact Author)

Swedish House of Finance ( email )

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London School of Economics and Political Science, Department of Finance ( email )

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Denis Gromb

HEC Paris

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France

Fausto Panunzi

Bocconi University - Department of Economics ( email )

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Italy
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+39 02 5836 5343 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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