The Value of Control and the Costs of Illiquidity

71 Pages Posted: 4 Aug 2012 Last revised: 4 Jan 2017

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Enrique J. Schroth

City University London - Cass Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 26, 2013

Abstract

We develop a search model of block trades that values the illiquidity of controlling stakes. 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. Using a structural estimation approach and U.S. data on trades of controlling blocks of public corporations, we estimate the value of control, the blockholders’ marketability discount and the dispersed shareholders' illiquidity-spillover discount.

Keywords: Control transactions, search frictions, marketability discount, illiquidity spillover, corporate governance

JEL Classification: G34

Suggested Citation

Albuquerque, Rui A. and Schroth, Enrique J., The Value of Control and the Costs of Illiquidity (November 26, 2013). Journal of Finance vol. 70, 1405-1455, 2015; ECGI - Finance Working Paper No. 357/2012. Available at SSRN: https://ssrn.com/abstract=2123663 or http://dx.doi.org/10.2139/ssrn.2123663

Rui A. Albuquerque

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Enrique J. Schroth (Contact Author)

City University London - Cass Business School ( email )

London, EC2Y 8HB
Great Britain

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