The Value of Control and the Costs of Illiquidity
71 Pages Posted: 4 Aug 2012 Last revised: 4 Jan 2017
Date Written: November 26, 2013
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: Suggested Citation